As noted earlier here, I was able to attend the Lay-Skilling trial for several hours on a couple of afternoons this past week. As I watched Jeff Skilling defend himself against criminal charges amidst the overwhelming societal bias that exists today regarding anything having to do with Enron, one thought kept knawing at me — the enormous waste caused by the government’s policy of criminalizing corporate agency costs.
As noted in this earlier post on the high price of asserting innocence, the known direct costs of the Lay-Skilling trial are sizable. The defense costs are currently in the $75 million range and the cost of the prosecution is at least that high, probably more. Skilling’s remaining net worth — around $50 million — has been frozen by the government, so that wealth has been stagnant for almost three years now. Defending themselves against criminal charges that could put them in prison for the remainder of their lives has been a full-time job for Skilling and Lay, so another cost is that neither of these undeniably-talented businessmen has been in a position to create wealth or jobs for well over three years now. Add in the horrific cost attributable to the Enron Task Force’s dubious decision to prosecute Arthur Andersen out of business and you have quite a direct expense ledger.
However, as enormous as those direct costs are, the indirect costs of criminalizing bad business judgments dwarfs the direct ones. Whether management makes such judgments correctly is a fundamental risk of business ownership. Criminalizing that risk — through the prism of hindsight bias — will simply make executives in the future less likely to take the risks necessary to build wealth and create jobs while not deterring in the slightest the Andy Fastows of the world from embezzling money. Business owners deserve protection from theft, but not from risk taking, and it’s not clear that government prosecutors know — or even care about — the difference.
That point was hammered home to me in the following two passages, one from the Lay-Skilling trial and the other from this engaging Kimberly Strassel/OpinionJournal interview of former AIG chairman Maurice “Hank” Greenberg. Late in Skilling’s testimony on Thursday afternoon, he was summarizing the state of Enron at the time he resigned as CEO in August, 2001 — a little over two months before the company began melting down — and noted the following about Enron’s flagging Broadband unit:
And one last thing — I’ll make the last one argument for Broadband because people criticize me about Broadband, and I will take the criticism. We — certainly, we made a mistake. But it wasn’t big. I mean, it was a billion dollars. We invested a billion dollars in the Broadband business. If it had worked, it could have been worth $30 billion. It didn’t work. We lost a billion dollars, but if you can make those kinds of bets, that’s the kind of the risk you’re [should be taking] as a corporation. And if you do a lot of [deals with a] downside of a billion and upside of 30 [billion], you’re doing a good job for your shareholders in the long run, in my opinion. This one didn’t work.
Enron’s failed broadband joint venture with Blockbuster was developing video on demand, which now exists on cable and is similar to Apple Computer’s iPod. Frankly, given the worth of that latter system, Skilling’s valuation of Enron’s Broadband business — had the company been able to capitalize on its investment — may have been low.
Following up on that thought, Greenberg comments on the dampening effects of criminalizing risk-taking:
One of the biggest problems” facing America’s competitiveness at the moment “is regulation,” [Greenberg] states. He notes the legislative fiasco that flowed out of Enron–Sarbanes-Oxley. “Any time you publish regulations in a crisis mode, you probably do it wrong,” he says, and as proof he points to all the companies now listing in London rather than New York. “Friends don’t let friends regulate in a crisis,” he jokes. [. . .]
The authorities themselves have changed. After Enron, “the regulators became far more aggressive, threatening boards of directors with all kind of dire things if they didn’t do certain things. What happens? The board simply takes over. And when that happens you don’t have a company that is thinking about innovation or risk-taking. . . . And once you stop thinking about risk and thinking only about compliance, you are no longer going to be a growth company.”
That’s particularly a problem for the insurance industry, which is entirely “about risk.” Of this, in particular, Mr. Greenberg knows of what he speaks. The accounting errors that Mr. Spitzer threw at AIG were related to finite risk insurance. Such products are a modern innovation, and play a vital role in managing risk and stabilizing balance sheets. Yet the rules were always murky as to how to account for the transactions. So what regulators and prosecutors may have allowed in a non-scandal era became fraud post-Enron. That sort of uncertainty is deadly for companies. Today, “everybody is playing it close to their vest, and don’t do anything. If you do something, you get slapped down, so why do it?” [. . .]
. . . Mr. Greenberg does note that New York has been worse than most at allowing a climate where prosecutors create law, rather than just enforce it. The overall legal climate, and basic system of due process, “has changed dramatically. We’re living in an environment now . . . in a public company, who do you talk to? Do you talk to yourself? You can’t talk to anybody. [The prosecutors] will have to start subpoenaing your thoughts.”
Business decisions necessarily involve judgments over various possible alternatives, and the nature of business risk means that a number of those decisions will ultimately turn out badly, as certainly occurred at Enron. But rather than allowing the civil justice system to sort out responsibility for such a loss, the increasing governmental mindset is to criminalize the loss by appealing to the jurors’ hindsight bias and urging them to convict business executives of crimes for making “the choice of seemingly riskier alternatives.”
Thus, in large part because of that dubious policy, Greenberg notes that “you couldn’t build an AIG today.” In an increasingly competitive world for creating wealth and jobs, is such an enormously costly policy one that we really want our government pursuing?
Larry Ribstein knows the answer, as he points to another of Greenberg’s comments:
So Greenberg today is turning away from investment opportunities in the US and focusing on China. He says “it’s nice to go to a country where they don’t pay as much attention to the headlines.” Only, it seems, to the bottom line.
The Great Waste
Following up on Larry Ribstein’s earlier post regarding the Kimberly Strassel/Opinion Journal interview of former AIG chairman Maurice “Hank” Greenberg, this post examines the enormous costs attributable to the increasing trend of government to crimina…
Perhaps the publicity of this trial will prevent other “undeniably-talented businessmen” from causing shareholders to lose their life savings.
FTPPro, even under the most negative analysis of Enron’s demise, Skilling and Lay did not cause “shareholders to lose their life savings.” All though Skilling and Lay share in the responsibility for Enron’s demise, the responsibility for Enron shareholder loss is much more varied and nuanced — embezzlers such as Fastow, possibly negligent directors, post-9/11 and post-bubble market conditions, poor investment decisions by shareholders, etc.
Criminalizing Skilling and Lay’s share of the responsibility only detracts from more reasoned assessment of responsibility for shareholder loss, in addition to its troubling deterrent effect on future risk-taking.
TK-
Excellent post summing up this trend that we see coming to a crescendo in the Skilling trial this week.
Not that this had anything to do with the core of your message, but I wouldn’t have closed the article with Ribstein’s quote about China being a place where headlines take a back seat to the bottom line. Chinese firms have for years been driven all by cash and none by profits. So much for the regard for regard for the bottom line. And the providers of all that liquidity (various state-owned institutions, for the most part), are driven entirely by the headlines (which their sponsor, the Party, writes!) Just seemed like a strange and inappropriate end to a superb post.
I also can’t help but point out the irony that in a world where there is so much wailing and gnashing of teeth about shareholders who lost their life savings in one stock, we are making criminals of those very shareholders’ agents for – you guessed it – taking inappropriate risks!
Whether there is enough evidence to convict beyond a reasonable doubt is one thing. Enron had a trading scandal in the late 80’s and Lay’s philosophy was, as long as it makes money it’s ok.
Did Skilling give a “bear hug” to Fastow’s deals? I don’t know. But if he did, that was clearly fraud. Skilling was Fastow’s boss. Now he wants to claim he new nothing. Only it’s Col. Klink saying it of Sgt. Schultz.
Skilling lied about the success of broadband. Enron built a potemkin village to make their trading floor look lively when analysts came in. There was the barge deal with Merrill Lynch. The energy stuff with California.
Are you suggesting that all these people committed illegal acts and Skilling new nothing of it?
Enron was a ponzi scheme. If there is not enough evidence to nail Skilling and Lay so be it.
But to imply that it was not a fraudulent, criminal enterprise is flatout false.
Kevin, I hear what you are saying about China’s dedication to market economics, which is viewed with skepticism by many Western businesspersons who have been burned there. But there is little doubt that the economic success of Hong Kong and Taiwan is forcing the mainland government to embrace market-based economic principles. My point is that while China is embracing such principles, we are increasing regulation-through-criminalizing risk-taking. I find that odd.
Addisonst, to characterize Enron as a Ponzi scheme shows such a lack of understanding of the company’s business and a predetermination of guilt that it is useless to respond to your comment.
Another indirect cost is that CPAs associated with a company’s audit over-audit because of fears of being framed by an Andrew Fastow. Further, because of fears of being seen as lacking independence, they refuse to give advice. Therefore, companies cannot get advice from those who know their company best, leaving the companies to fly blind. How does this help shareholders?
To quote “A Tough Act to Follow” by David M. Katz/CFO Magazine at http://www.cpa2biz.com:
“But as CFO reported in “Fractured Fraternity” (September 2005), finance managers say external auditors even shy away from offering advice on topics that aren’t restricted by Sarbox, things like mergers and acquisitions and tax issues.
In practice, many finance executives miss their auditors’ advice. Two years ago, for instance, David Koeninger, CFO of Radiation Therapy Services Inc., in Fort Myers, Florida, sought information from his company’s auditor about how to calculate and report the sales of a minority interest in a business. To his surprise, Koeninger says he found the accountant suddenly tongue-tied. “Make your decision,” the auditor purportedly told the finance chief, “and we’ll tell you whether it’s right or wrong.””
Accounting issues are hardly cut-and-dried. Now clients are supposed to guess. Good luck.
TK,
when I read thru you post its just surreal–
first, you keep talking about risk taking and “business judgment,” but the criminal charges have nothing to do with either–they are about the age old problem of people lying, saying one thing when they know or believe something else to be the truth
second, you always refuse to talk about the issue that cuts the heart of you agency argument and that is that stocks are a form for currency, that can be used to buy other companies. if one lets the skillings and lays free to manipulate earnings, because of Greshamís Law, in very short order every company would be manipulating earnings (which is basically what happened after Bank of Denver, anyway) just to defend themselves against been taken over by con artists.
third, one of your readers wrote, “because of fears of being seen as lacking independence, they [accountants] refuse to give advice. that is a good thing. exactly what counsel should be coming from an accountant? They are only supposed to do one thing–produce reliable numbers that are uniform across industries and the economy as a whole. Accountants are supposed to provide an investor with the ability to decide whether to invest in GM or Ford, or in a regional bank in Florida or Oregon, nohting less or more.
While we are on the subject of risk management and insurance, how about Skillingís timely use of a short position in AES stock to insure against a decline in his personal Enron holdings? How come we are just now finding out about this hedge? I guess I missed the disclosure of that one. Gee, I wonder if this information might have been useful to stockholders and 401k plan participants back in 2001.
Moe, if the trial is simply about, as you say, lying and not about differing opinions over business judgments, then why has the prosecution been careful to ensure that dozens of witnesses with exculpatory testimony for Lay and Skilling not testify? If it were simply about lying, wouldn’t the government want all witnesses with relevant testimony available to assist the jury in determining the truth.
Moreover, your simplistic reliance on Gresham’s Law has been long been effectively refuted by efficient capital market theory, which provides that, in an efficient market, current prices always and fully reflect all relevant information about the commodities being traded. Sure, frauds will continue to occur in the market (even with your attempts to regulate lying), but ECMT holds that markets absorb the information about the fraud and adjust accordingly.
And your observation about the purpose of auditing is wildly overblown. Auditors provide information to the marketplace with regard to a company’s accounting of its financial affairs. It’s one bit of information amid the myriad of information available in determining whether to invest in a stock, and never was intended to insure an investor from being defrauded, although audits usually reduce that risk.
I could have been more specific in regards to accountants’ advice.
Before the hysteria that produced SOX, accountants used to give advice on the business, tax and accounting consequences of alternative courses of action. Then the client chose the course of action.
For example, an individual considering buying a rental/vacation property or investing in an oil drilling venture would surely want to know the legal and tax ramifications. Should we prohibit the individual from asking his CPA & just tell the individual to figure it out for himself? Yet under SOX, corporations considering a merger or other transactions with complicated accounting or tax issues are being told just that.
Most people seem to labor under the illusion that accounting systems produce precise values that one can measure with the same exactitude of counting the change in one’s pocket. Not so. Even the average individual who has acquired some assets would find calculating his net worth to be imprecise because not every asset can be valued as easily as cash.
A business has a lot more assets and therefore a lot more estimates (eg, depreciation, depletion, amortization). Whereas the government issues cash-basis financial statements which omit liabilities (such as all liabilities for pension obligations), thus grossly understating our deficit and national debt, businesses are required by the SEC to issue accrual-basis statements. Accrual-basis statements attempt to match revenues and expenses for a given period and disclose all liabilities (including pension obligations) but the trade-off is that is that a lot of assumptions are built into the financial statements. For example, who can say with any precision how much in pension dollars any individual will be paid?
Financial statements are only as good as the accounting system that produces them. As business grows ever more complex and as individuals discover new techniques (hacking & other computer fraud) to undermine computer accounting systems, there is a constant need to update and strengthen accounting systems in order to ensure optimal accuracy in financial reporting. Just as we need to constantly update our computers to guard against viruses, spyware, etc., so do businesses. A company’s auditors are in the best position to see where an accounting system is vulnerable and can be strengthened because, in looking at different companies, they see what works and what doesn’t.
Because of SOX, an accounting firm performing the audit can no longer help the client strengthen the client’s accounting system. The auditor is supposed to give his opinion on financial statements produced by an accounting system that may or may not be competently updated. Does that sound reasonable?
SOX and the government’s over-reaching prosecutions are both nothing other than political solutions to a deliberately mistated problem.
In the face of crisis, people who are rational and ethical wait to analyse what went wrong and avoid rushing to judgment and acting in hysteria. This is the opposite of what transpired after Enron.
Business fraud is unacceptable. There is no question that Fastow & his henchmen committed frauds in the Enron SPEs. Enron Bankruptcy Examiners determined that the fraud was aided and abetted by various banks who signed fraudulent documents asserting the banks were “investing” in the Enron SPEs when in reality the banks were taking back oral promises of repayment. The banks recorded these same transactions on their own books as loans. Neither the Enron SPEs nor the banks in the fraud were Andersen clients.
Whereas at the banks, the transactions documented as “investments” were booked as loans, at Enron, the transactions were booked consistent with the documentation of “investments” signed by supposedly reputable banks. Auditors looked for inconsistencies. There were none at Enron or in Enron’s SPEs; the inconsistencies were all at the banks. According to the Enron Bankruptcy Examiners, the banks involved are Citigroup, JP Morgan Chase, Bank of America, CreditSuisse First Boston, Royal Bank of Canada, Toronto Dominion, Canadian Imperial Bank of Commerce, Royal Bank of Scotland, Barclays, BT/Deutsche and Merrill Lynch.
Knowing this, the government deliberately destroyed Andersen. Why? Because after collecting massive campaign contributions from Enron, politicians (specifically the House Energy & Commerce Committee) urged the SEC to exempt Enron from investor protection laws. Had those investor protection laws applied to Enron, Enron would not have been allowed to set up the numerous SPEs where Fastow committed the frauds. Since Congress holds the purse-strings for the SEC, the SEC did their bidding.
This does not mean that the SEC or politicians were party to Fastow’s fraud, nor does it mean that Lay or Skilling were. Each individual should be judged based on facts, not supposition, hysteria, envy or ignorance.
For my part, I cannot say with certainty exactly who knew of Fastow’s fraud. Absent factual proof, I believe in giving people the benefit of the doubt.
What I do know is that a lot of individuals in the House Committee on Energy & Commerce, the SEC, the Dept. of Justice & the Powers Commission knew that Andersen was not the auditor of either Enron’s SPEs or the banks who aided and abetted Enron. Yet they chose to condemn & destroy Andersen while Andersen was under gag order in order to distract attention from the fact that political contributions buy special treatment, including exemption from investor protection laws.
The DOJ indicted Andersen for politely asking employees to follow a routine audit step that was both perfectly legal and ethical. The trial court and the 5th Circuit condoned the DOJ’s over-reaching. In my opinion, people who pervert the rule of law are no better than Fastow.
TK, you continue to evade, rather than answer simple questions.
I challenged you about whether the case was about “business judgment” or lying. You don’t respond but instead go off on a tangent–the government is keeping witnesses from testifying. That has nothing whatsoever to do with whether the charge is about “business judgment” or lying.
Do you seriously want a criminal justice system in which witnesses can testify for the defense without having to face the consequences of giving false testimony? (That reminds me of the lawyer calendar joke–why are you settling the case? because I’ve used those witnesses before, myself; they are good witnesses).
Second, you offer another red herring–the efficient market theory–in response to my second quesion.
The premise of an efficient market is honest information. If I pump up the value of my stock by falsely reporting earnings, then I can use that stock to buy companies who have not pumped up their earnings, because the market doesn’t know that I have lied and manipulated the price of the stock. For the efficient market theory to work, which theory no on accepts of any repute (query, if we had efficient markets, how can we have Warren Buffett?), the market can only have honest information.
Moe, there was no evasion whatsoever. You and I disagree as to whether the case is about business judgment and lying. So, I make the point that, if the case is really about lying, then why is the government preventing witnesses from testifying who have something relevant to say on the issue of whether it is about lying? Who is being evasive?
Moreover, by calling something a red herring doesn’t make it so. Your statement about ECTM is wrong. ECTM assumes that a certain amount of the information in the marketplace will be true and a certain amount will be false, and that the market will adjust accordingly.
It’s funny you should mention Buffett with regard to all of this, who had direct involvement in the basis of the government’s allegation regarding AIG’s alleged fraud. That’s not to suggest that Buffett should be prosecuted for a crime. It’s more just to show how absurd the government’s criminalization of risk-taking has gotten.
Perhaps a little parsing would be helpful.
The financial statements were wrong. Fastow, Skilling & possibly Lay signed off on those financial statements, asserting that all liabilities were disclosed when in fact they were not.
The liabilities not disclosed were disguised within Enron’s SPEs, which (except for Chewco) were audited by KPMG. Chewco was unaudited. Because banks signed fraudulent documents asserting to help Fastow & ??? disguise loans, KPMG was unable to unearth the fraud in the Enron SPEs, but the outside auditors of the various banks (none audited by Andersen) may or may not have known about their clients’ participation in the fraud.
Participation by Lay & Skilling in Enron’s SPEs (if any) appears limited.
When the disguised loans in the Enron SPEs were uncovered, those disguised loans reversed the appropriate accounting from mandatory non-consolidation of Enron’s SPEs to mandatory consolidation under the arcane & ridiculous rules regarding consolidation of SPEs.
But whether or not the SPEs were consolidated, the stock price zoomed far beyond a price appropriate to the financials published. In other words, there was a disconnect between the stock price and the financial statements. Apparently, most investors didn’t bother to read the financial statements. Auditors have no control over stock price.
Now, why the disconnect. Moe asserts that it must be because Lay & Skilling were part of a pump and dump conspiracy. But where’s the proof? The purported ability to read minds is not proof.
Skilling & Lay may be egotistical. They were certainly paid a lot of compensation (as were many at Enron) and there is no doubt that they approved some poor investments using too much debt, as Mr. Lay has admitted. But none of that constitutes willfull intent to deceive the auditors or the public. Whereas the Enron Bankruptcy Examiners found extensive proof about Fastow & the banks, I don’t recall any proof against Skilling or Lay and there appears to have been none presented at trial.
Why then the disconnect between stock price and the financials? Was it just the “irrational exuberance” Mr. Greenspan tried to warn investors about? Was it Lay & Skilling in a “pump & dump” scheme? Or was it something else?
There is one connection that has not yet been discussed anywhere, to the best of my knowledge. You recall that one of the banks most active in the Enron fraud was Citigroup. In addition to helping Fastow hide billions of dollars of loans at Enron, Citigroup admitted to the Governmental Affairs Permanent Subcommittee on Investigations that Citigroup had participated in similar frauds with “at least three” other corporations. (How many is “at least three”? Three or three hundred?)
With that background, recall Jack Grubman of Smith, Barney (which is part of Citigroup.) While Citigroup was busy helping Fastow disguise billions of dollars of loans, Jack Grubman was pumping Enron stock. As I recall, Mr. Grubman was still listing Enron as a Buy until at least the week before Enron’s bankruptcy.
Whereas Lay & Skilling may or may not have been part of a pump & dump scheme, the role of Citigroup & Jack Grubman of Smith Barney appears more problematic.
as to Skilling and Lay being part of a pump and dump conspiracy, I did not say such . . .although the government proved such as to Skilling who pumped, ran, and sold
I was merely pointing out to TK that “agency costs” are not the only, let alone, primary reason why we have criminal laws against making false statements in financial statements.
The big reasons why we have such laws is that stock is a form of currency, which can be used to “buy” other companies–I’ll give you 2 shares of my stock in A for 1 share of your stock in B (this is a a simple variation, one can pledge stock in A to a bank for a loan to buy B’s stock, etc., etc., etc.) Regardless of the form, if companies were free to manipulate earnings as TK advocates they should be, then all companies to survive would have to manipulate their earnings–what few good stocks with honest books would be driven out of the market. Greshham’s law.
TK has reached a complete point of intellectual bankruptcy in his arguments–the market assumes a certain amount of fraud–TK you are now just making it up as you go along, rather than admit you are mistaken in your views.
I think it’s really questionable just how “undeniably talented” these two businessmen are. After all, Enron’s collapse happened on their watch. It remains an open question whether they realized what Andy Fastow was up to, but virtually everyone agrees that it was atrocious judgment to allow Fastow to operate these partnerships in a clear conflict-of-interest with his Enron duties.
Moe, a sure sign of “intellectual bankruptcy,” as you put it, is mischaracterizing one’s position, as your post does with mine.
I have never advocated that clear business fraud should not be prosecuted. However, I have a big problem with giving the state the power to criminalize conduct that is not a clear fraud, particularly where the state is allowed to script a case against the defendants by cutting deals with a few witnesses and preventing other witnesses from testifying. Even with that, it took the prosecution over two months to present its case against Lay and Skilling. Clear evidence of criminal conduct rarely takes that long to present.
Enacting regulations that would prevent all fraud in the marketplace sounds good in theory, but is poor public policy in reality because such regulation would discourage beneficial risk-taking. Thus, the goal ought to be to enact enough regulation to discourage fraudulent conduct while not so much as to discourage beneficial risk-taking that generates wealth and jobs.
The government contends that Hank Greenberg and Warren Buffett were involved in manipulating AIG’s earnings in a similar manner to the way in which Lay and Skilling are accused of manipulating Enron’s. Moe believes such matters are clear and that presumably both should be prosecuted for fraud. I do not believe that such matters are so clear and prefer that the responsibility, if any, for the alleged manipulation of earnings, if any, be sorted out in a civil context.
Two of the most startling criminal cases of our time are the Andersen and KPMG cases.
The jury instructions in the Andersen case, echoing the theory of the prosecution and affirmed by the 5th Circuit, criminalized the destruction of any document at any time for any reason, no matter how many copies of the document were kept. Could we find any individual or company in America who wouldn’t be a felon under those instructions?
KPMG partners have been indicted for selling a tax shelter that has not been determined to be illegal. Before accusing anybody of criminal behavior, a rational, ethical person would first determine the legality of the tax shelters.
What is surprising is that many individuals actually defend these egregious abuses of government power. How can this be?
The first problem is that the complexity of business, science, technology is growing exponentially. We’re all ignorant, just in different things. The second problem is the failure to think critically, to rely on fact and reason instead of just parroting the mantra of the day.
For example, we have all heard that public accounting firms should not earn “consulting fees” from audit clients. Before echoing this sentiment, a rational person would ask, “What are consulting fees?” Under the chairmanship of Arthur Levitt, the SEC defined “consulting fees” as anything other than the bare-bones audit. Under that definition, any fees relating to business process and risk management, tax consulting, due diligence related to acquisitions, work performed in connection with registration statements and various statutory and other statements should be classified as “consulting fees.” “Consulting fees” also includes advising clients of the proper accounting & tax treatments for alternative courses of action and, as Andersen did on the Enron job, seeking advance SEC approval before allowing Enron to set up SPEs. In other words, part of the cost of a careful audit must be disclosed as “consulting fees” which were then used to destroy Andersen. Accounting firms do not make the business decisions that run companies; that’s the job of management & the Board.
The demogoguery about “consulting fees” has real costs. Because Andersen was condemned for “consulting fees” & SOX was enacted to ban them, CPAs are refusing to answer questions about accounting or tax treatment of prospective transactions. Further, painting targets on the backs of CPAs has inspired many to abandon auditing and public accounting altogether. Logic tells us there will be more problems, not less. In the business world, criminalizing innocent behavior can only stifle innovation.
Demogoguery, hysteria, ignorance, lack of due process and presumption of guilt all go hand in hand. We have reverted to the days of the Salem witch trials.
It’s been a while since this was in the thread but it’s been a while since I’ve read the thread so here goes.
As an individual and institutional participant in various capital and commodity markets, I can say that markets absolutely do discount information for its probability of truthfulness. They further discount it for the probable reality should the information be false. They further discount the change in likelihood of truthfulness of information gathered in the past given the likelihood of truthfulness of the then-current information. And on, and on. Efficient markets absolutely do not assume true information, at least not here in the real world.