This Wall Street Journal ($) article profiles Houston criminal defense attorney, Mike Ramsey, who is heading up the criminal defense team that is defending former Enron Chairman and CEO, Kenneth Lay. The article captures Mr. Ramsey’s homespun wit in the following passage:

Even if he doesn’t succeed in gaining a separate trial, the effort gives Mr. Ramsey the opportunity to showcase is readiness to quickly rebut the charges. He seems to particularly enjoy attacking the bank-fraud charges brought against Mr. Lay in connection with loans he took out between 1999 and 2001. Part of the loan-related criminal charges involves a federal banking rule known as Regulation U.
Mr. Ramsey asserts that the government is unfairly going after his client for an alleged violation of some obscure rule. Until the indictment, says Mr. Ramsey, “I thought Reg U was a tomato sauce.”

As noted on this blog before, Mr. Ramsey is a member of Houston’s remarkably talented criminal defense bar, which in many respects is the legacy of legendary Houston-based criminal defense lawyers, Racehorse Haynes and the late Percy Foreman. A couple of other members of this prominent group of Houston criminal defense lawyers — Dan Cogdell and Tom Hagemann — will be defending clients in the upcoming mid-August trial of the Enron-related case known as the Nigerian Barge case.
Other prominent members of Houston’s criminal defense bar include Dick DeGuerin, who along with Mr. Ramsey, obtained the remarkable acquittal of murder charges for Robert Durst, Dick’s brother, Mike DeGeurin (yes, the brothers spell their last name differently), Jack Zimmerman, Rusty Hardin, David Berg, Joel Androphy, Robert Scardino, Mike Hinton, and Robert Sussman. The expertise and talent of Houston’s criminal defense bar compares favorably with that of any criminal defense bar of any city in the country.

The Wall Street Journal’s ($) Holman Jenkins’ weekly column today addresses the different troubles facing former Enron Chairman and CEO Kenneth Lay and Pfizer’s CEO Hank McKinnell.
First, Mr. Jenkins examines the indictment against Mr. Lay and observes that it essentially charges him with the crime of making false public statements in carrying out his duty to save Enron. That duty to Enron’s shareholders, investors and creditors conflicted with Mr. Lay’s other duty to tell the truth to those same folks:

Much will depend on what he was told by Enron employees in the weeks between his return to the CEO’s job and Enron’s collapse a few weeks later. The famous Sherron Watkins memo and follow-up meeting may have put Mr. Lay in the proverbial double bind. He could have told employees and investors that Enron had many sound businesses but, alas, the accounting mess would likely provoke a crisis of confidence among lenders and trade partners, driving the company out of business for lack of credit to continue its day-to-day operations.
Saying as much, of course, would have precipitated the very implosion that it was Mr. Lay’s mission to prevent for the benefit of employees, creditors and investors. “Oh well,” he might have said, “I saw my duty and did it. I disclosed all the material facts that investors deserve to know, even if it means the stock will go to zero before they can act on it.”
Failing to do so is what he’s being prosecuted for now, in good part. The indictment dwells most heavily on his public statements of confidence in the company after he reclaimed the helm of a sinking ship. No, we wouldn’t even try to guess at a solution for this problem. In theory investors deserve the truth, even when it hurts. Please, can’t somebody in the economics department figure out a way to measure how many companies lied their way back to solvency, saving their shareholders a total loss?

The other trial that Mr. Jenkins addresses is a financial and political one, which Pfizer and other drug companies face in a marketplace that increasingly limits the ability of U.S. drug companies to generate profits and fund research and development on new drugs:

By decade’s end, the last major market where prescription drugs aren’t currently subjected to price controls — the giant U.S. market — will feel the touch of the visible hand. Perversely, the industry can thank George W. Bush. Whatever he intended with his Medicare reform, the government sooner or later will try to limit its pharmaceutical spending on seniors by dictating prices.
History is replete with industries with high fixed costs and low marginal costs that embraced government regulation, believing they could capture the regulatory process and assure themselves an acceptable rate of return. Some say the drug companies will manage the politics of price regulation too, making up on volume what they lose in dictated prices. Don’t bet the cat on it. That approach ended badly for the railroad and electric power industries, and both could at least demonstrate clearly for regulators the relation between capital going into the pipeline and services to the public coming out the other end. Drug investment, by contrast, is a speculative shot in the dark, unfit for any kind of regulatory review that we can think of.

Mr. McKinnell at least sounds like a man who believes this future can be avoided, pressing for the U.S. to challenge price controls in other countries so Americans aren’t stuck bearing the whole cost themselves of the industry’s massive R&D budgets.

Inasmuch as the Bush Adminstration lacks a coherent approach to reforming America’s health care finance system, count me as skeptical that this administration can develop a sensible plan to require other countries to fund a fair share of drug R&D costs.

Enron’s excesses and the unprecedented media firestorm over the company’s collapse have muddled the reasoning of even normally clear thinking business columnists.
The latest to be afflicted is the Wall Street Journal’s ($) Alan Murray, who comes up with this doozy in his column today:

Mr. Lay spent more time schmoozing with politicians and picking fabric swatches for his Gulfstream V corporate jet than studying special-purpose enterprises. As a result, his footprints inside the energy company are shallow, and his fingerprints few. Conviction will be difficult.

In the case of Enron, we already know a giant financial fraud lay at the heart of the enterprise. The convictions of former Chief Financial Officer Andrew Fastow and former Treasurer Ben Glisan established that. At stake in the Lay case isn’t whether fraud was committed but whether the chief executive should be held [criminally] responsible.
For the sake of American capitalism, he should.

Mr. Murray then goes on to base this rather startling expansion of criminal liability on the anecdotal experience of Federal Reserve Chairman, Alan Greenspan:

In unusually clear testimony in July 2002, Chairman Greenspan railed against the “infectious greed” that had invaded American business, arguing that the best antidote was strong and ethical CEOs. “It has been my experience on numerous corporate boards that CEOs who insist that their auditors render objective accounts get them,” Mr. Greenspan said, “and CEOs who discourage corner-cutting by subordinates are rarely exposed to it.”
“Although we may not be able to change the character of corporate officers,” he concluded, “we can change behavior through incentives and penalties.” That is what is at stake in the Lay case.

So, let’s see here. Mr. Murray reasons that, in the “special” case of a business executive, we should treat them like bank robbers in the criminal justice system even though the business executive did not intentionally commit a crime. If the CEO is simply lazy and negligent, then Mr. Murray reasons that she is intentionally neligent and lazy and, therefore, should have the same degree of criminal liability as the bank robber.
As one of my former professors used to say whenever confronted with such muddled reasoning: “Pooh-pah.”
First, using the criminal justice system to remedy the problem that Mr. Murray addresses is akin to using an ax where a scalpel is needed and available. Extending criminal laws that penalize intentional crimes to penalize lazy and negligent businesspeople has the primary effect of confusing and ultimately undermining society’s confidence in the rule of law. Indeed, such application of criminal laws may deter a few folks from becoming CEO’s in the first place (although there is no empirical data supporting such a proposition), but it will not deter laziness or negligence.
However, even more important is the slippery slope. If Mr. Lay should be convicted for being lazy and negligent, then why should Enron’s directors not also be convicted of the same crime? Or should they not be held criminally responsible for their laziness and negligence because they only flew commercial while Mr. Lay flew in the company’s Gulfstream V? Or because their stock options were considerably less than Mr. Lay’s? Or is it because they could not have reasonably known that Mr. Fastow was a crook while Mr. Lay should have?
Similarly, what does the system do with the CEO who is not lazy or negligent, but is truly undermined by crafty underlings who figure out a way to defraud the company despite the CEO’s diligence? Convict the CEO anyway? Or carve out an exception to the crime if the jury finds that the CEO is not lazy or negligent? And if that exception is crafted, can you imagine the procedures and systems that CEO’s would establish so that they would appear not to be lazy and negligent, particularly if they really were lazy and negligent? What webs Mr. Murray would have us weave!
Part of the cost of a free and productive economy is the risk of Enron-type failure. Misapplying criminal law neither will nor should deter such failures, and is much more likely to promote societal cynicism than responsible business practices. As Professor Ribstein notes in his post on Mr. Murray’s column, “we have the tools within our current system. Responding to Ken Lay’s irresponsibility with equivalent excesses in criminal prosecutions is not the answer.”
For a reasoned argument in favor of holding CEO’s responsible as a principal for corporate wrongdoing, see this Professor Bainbridge post, although Brad DeLong is not so sure.