Trial by Enron Part III: Opinions

by

Ross M. Miller
Miller Risk Advisors
www.millerrisk.com
April 24, 2006

The biggest challenge in writing a book about Enron is coming up with a good storyline. As the co-author and "script doctor" for What Went Wrong at Enron, I found myself at a loss to come with a storyline that was both honest and compelling, especially when working on the tightest imaginable schedule. Certainly, Enron had greed, strippers, and the Bush connection; however, as I demonstrated in the previous two installments, these were no big deal. Enron's biggest problem, as GE CEO Jeff Immelt characterized it soon after my book began to fly off the airport bookshop shelves, was a "bad business plan." Compounding that bad business plan was the ease with which people just like you and me (at least the "you and me" who read my commentaries) can overstep ethical and legal boundaries.

In surveying the Enron scene in 2002, I saw the potential for a meaty Enron story down the road. One advantage that I had as an Enron author was a Baconian (in the sense of Kevin) connection with the three central figures of Enron drama. Aside from being considered for the Enron Chair of Risk Management at Rice University (a post that happily remained unfilled at the time of the Enron disaster), I taught in the University of Houston's economics department a few years after Ken Lay got his Ph.D. from there, I grew up on the other side of New Jersey's Union County from Andy Fastow, and I was hanging around Harvard Business School at the same time as Jeff Skilling. (I was technically in the economics department, but one of my thesis advisors, Mike Spence, had a joint appointment at the B-School, so I sat in on several classes, quite possibly adjacent to Mr. Skilling.)

I may not have known Skilling personally, but I knew "the type." Furthermore, I knew another player in the Enron drama, who was not just a Harvard contemporary of both Skilling and myself, but who also lived down the street from me while I was growing up in Elizabeth, New Jersey. His name is Michael Chertoff. Although he currently faces his own personal Enron at the Department of Homeland Security, when the Enron Task Force was formed he was head of criminal activities at the Justice Department and the Task Force reported to him. When Chertoff's around, Skilling is no longer the smartest guy in the room, not by a long shot. Chertoff was the basis one or more of the brilliant law students in Scott Turow's One L and went on to do all the right things to get to the head of the line for a seat on the Supreme Court until he was put in charge of defending America from terrorists and hurricanes.

Chertoff vs. Skilling would have made a great story—both of them are hyperachieving products of the amoral Harvard that blossomed during the Disco Age. Heck, I could even have worked in some material about my classmate, Larry Summers. Unfortunately, not only has Chertoff moved on, the position of the head of the Enron Task Force turns over almost as often as that of Duke's lacrosse coach. Another book idea bites the dust. With nothing juicy to write about, rather than report on the Enron trial first-hand from Houston, I am doing so from the comfort of the service center waiting room at my local Honda dealer.

I have been around long enough to know not to make any predictions about the outcome of the Enron trial. There is a lot that can go on in a courtroom that the press corps can fail to notice and juries are notoriously unpredictable. Also, there is a tendency for the press to gang up on Enron—they jump on any faux pas by the defense, while giving the prosecution a free ride.

Naturally, Federal prosecutors hold all of the trump cards, save one. They can draw on the boundless resources and taxing authority of the U.S. Treasury Department. This advantage alone is sufficient to make all but the wealthiest or stubborn defendants go the settlement route regardless of their guilt or innocence. Prosecutors also are reputed to have a less-than-stellar record in turning over exculpatory evidence. (America's most famous fictional prosecutor, Law and Order's Jack McCoy, is a personification of the ends justifying the means. If his routine prosecutorial misconduct were in any way unusual, one would think that he'd be off the air by now.)

The missing card in prosecutors' stacked deck is courtroom talent. Talented prosecutors do not stay put; they move on to bigger and better things, either in the public or private sector. (Jack McCoy's failure to keep his hands off the string of supermodels assigned to work with him makes him a notable exception to this rule.)

Preliminary indications, as filtered through the media, are that Jeff Skilling should have taken my advice to keep his ass off the witness chair. Skilling faces a simple dilemma. If he "acts naturally," he comes off as a cold, arrogant, and unsympathetic figure. If he "acts nice," he comes off as a phony and, by extension, a liar. All reports are that Skilling has managed to do both at the same time. Under friendly questioning by his own attorney, Daniel Petrocelli, he is said to come off as "affable," a word rarely associated with former Baker Scholars and McKinsey wunderkinder. Under cross-examination by prosecutor Sean Berkowitz, his natural obnoxiousness shines through. I feel your pain, Jeff—send me a postcard from the pen.

Ken Lay has the advantage that he's no Baker Scholar and is said to be a genuinely nice guy. Were it not for the fact that few people with the number of years that Ken has under his belt possess the mental agility to tell a consistent story through days of cross-examination, it might make sense for him to take the stand in his own defense. (This is not an ageism comment, but a statement of biological fact. Did I mention that I was a classmate of Larry Summers?)

The case against Ken Lay largely comes down to a single issue: Is it a criminal offense for a CEO to promote his company's stock to his employees at the same time that he is selling it and when the company's prospects for the future are not as rosy as the CEO portrays them? This is a particularly sticky question when the failure of the CEO to talk up the company could be reasonably expected to trigger a chain of events that would destroy it. This is a classic case of multiple equilibria of the sort that Jeff Skilling and I both studied at Harvard in the late Seventies and that were a central research focus of the constellation of faculty stars that included Kenneth Arrow, Thomas Schelling, Howard Raiffa, Mike Spence, and Richard Zeckhauser. Should Ken Lay go to jail simply because he found himself caught on the wrong side of a bad equilibrium?

The Enron case exposes the larger issue of what should constitute a criminal act during in the course of doing business. It should not be overlooked that many in the anti-Enron camp, including many members of the "mainstream media" are fervent believers in the tenet that "property is theft." To them, not just Enron, but all traditional corporations, need do nothing more than exist to be criminal enterprises. This message comes through loud and clear in the string of anti-business "documentaries," of which the Enron flick is the latest installment.

It is frequently observed that a starving man who robs a loaf of bread can be sent to jail, but the executives of a corporation that "steal" millions of dollars through civil offenses can walk free. I have personally been the victim of numerous small "rip-offs" by corporations both great and small, some that certainly strike me as criminal, but I am not holding my breath waiting for the day that I can watch their CEOs do the perp walk on CNBC. For now, the best that one can do is avoid patronizing such establishments and use the power of the Internet to get the word out about corporate miscreants. (Let me take this opportunity to renew my call for the boycott of Dunkin' Donuts over the great bagel sandwich mispricing incident.)

While most Americans outside of the mainstream media do not entirely believe that property is theft, they do harbor a rational—if somewhat perverse—desire to see rich and/or powerful people hauled off to prison. Martha Stewart helped America feel good about itself and the two Enron defendants could further stoke the fires of schadenfreude. The problem is that prosecutors tend not to go after the worst offenders or the ones whose conviction would generate the most social or economic benefit, but rather those that generate the most publicity. That both judges and prosecutors are overeager to put prominent executives behind bars is demonstrated by the fact that their guilty verdicts are routinely overturned on appeal.

There are plenty of corporate criminals to go around. Government just does a lousy and inefficient job of rounding them up and putting them away. We are already well along the road to privatizing the prisons. Perhaps instead of having the public sector continue to needlessly persecute executives, we should leave it to the private sector to prosecute them.

Copyright 2006 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to www.millerrisk.com.