It’s hard to imagine that the federal government could have sent worse signals to foreign investors in US markets and businesses than the ones that it sent over the past week.
First, there was the latest news about the NatWest Three, the three UK bankers who had the misfortune of making an investment in one of Enron’s special purpose entities controlled by former Enron CFO Andrew Fastow and his right-hand man in crime, Michael Kopper. Remarkably, the only reason that the NatWest Three were spared from the Enron Task Force demanding their incarceration in Houston’s downtown Federal Detention Center pending their trial was the intervention of UK Prime Minister Tony Blair, who assured an angered British Parliament a week ago that the bankers would be released on bail.
Nevertheless, even Blair’s intervention didn’t stop the Task Force from demanding that the bankers remain in the US pending their trial (despite the fact that the three offered to waive extradition for trial) and that the three friends live apart and not talk to each other about their case unless their counsel is present. Unbelievably, the federal magistrate who adjudicated the bankers’ bail motion accepted the Task Force’s ludicrous “live seperately” and “no-talk” demands, which means that three UK friends in a foreign land must live alone and cannot talk freely with each other while preparing their joint defense in an extraordinarily unfriendly venue. In the meantime, their only known accusers — admitted felons and liars Fastow and Kopper — have no such restriction in hobnobbing with each other and continue to live comfortably in their expensive Houston homes.

Meanwhile, UK business executive David Carruthers remains in an orange jumpsuit and is being moved from Dallas to St. Louis in chains and handcuffs after his arrest by federal authorities earlier in the week while changing planes. This Times Online article puts the situation in perspective for UK investors:

The US authorities seem to have abused an anti-terrorist deal, allowing them to vet passenger lists in advance, as objectors to the arrangement had feared. Misuse of the laws on federal racketeering, money laundering and extradition is a sadly routine feature of the US justice system. It is no consolation to holders of BetonSports shares, which have been suspended, that Mr Carruthers believes that the company was acting legally. Nor will blaming US practice help investors in larger rivals in the fast-expanding internet gambling sector. But it should make us more aware of catastrophic risk.

Finally, the masterful Larry Ribstein takes stock of the Justice Department’s decision to go Enron on Brocade’s former CEO and human resources VP over the overhyped problem of backdating stock options:

[T]his is about criminalizing agency costs. By all reports, backdating was a very widespread practice, potentially affecting a significant percentage of all public companies. While some smaller firms were doing it ad hoc, other bigger ones probably had advice of big accounting firms and at least in house counsel, at least some of whom were not gaining personally from the options. For example, the WSJ’s scorecard of companies under scrutiny includes, among others, Apple, Barnes & Noble, Home Depot, Intuit, Microsoft, Monster. [. . .]
Are we nevertheless going to indict executives in all of these companies? And if you’re going to indict the HR director at Brocade, how far down in the other companies? If the Brocade CFO knew about this and furthered the fraud, as the SEC charges, why not indict him, too, instead of just a civil complaint? Then why not all the other CFO’s at all the companies in such a position. What about all the non-executive employees who got the options and knew about the accounting/disclosure problems?[. . .]
. . . [C]riminalizing this business practice is not the answer. There is little doubt that the combination of regulation, civil liability and markets can solve — indeed, probably already has solved — any problems here. In fact, criminal charges are so patently not the answer that I suspect that one big effect of this scandal will be a reexamination of the whole issue of criminalizing agency costs.

See here for Steve Bainbridge’s contrary view in regard to the Brocade indictment. I hope that Larry is correct on that last point about reexamining the federal government’s dubious policy of criminalizing agency costs, but his weekly disassembling of NY Times columnist Gretchen Morgenson identifies one knawing problem that needs to be overcome if that reexamination is to take place:

It would be nice if [Morgenson] gave us a little more analysis and a lot less overheated rhetoric. Of course that assumes Morgenson is interested in informing her readers and contributing positively to the executive compensation debate. On the other hand, if she is interested in ratcheting up the hysteria of readers who want their daily fix of anger and resentment at executive greed, she’s doing a fine job.

And don’t forget what is likely to result from relying on resentment and scapegoating rather than dispassionate and objective analysis.