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Three Years After Enron It Looks Like No One Learned a Thing
Published on Saturday, December 18, 2004 by
Three Years After Enron It Looks Like No One Learned a Thing
by Charlie Cray

The FBI's new five-year strategic plan has a section on white collar crime that begins with a startling admission:

"Major white collar crime will impact the U.S. economy over the next five years."

Note that they wrote "will." Not "could."

Do they know something we don't? They explain that "the FBI is currently investigating over 189 major corporate frauds, 18 of which have losses over $1 billion. The erosion of public confidence in the management of public companies will, if left unchecked, have a negative impact on the stock markets and capital raising, which will in turn have a negative impact throughout the U.S. economy."

I wonder if that explains why the AP reported the other day that while corporate leaders put a happy face on the market, they are "running for the doors themselves." In November, top corporate insiders sold $6.6 billion worth of stock, the highest amount since August 2000. (See Rachel Beck, "Why Are So Many Insiders Selling?" AP 12/14) Remind you of Ken Lay telling Enron employees to hold onto their stock while he cashed out?

It's clear from the continued rise in CEO Pay and the obstruction of even the most modest of reforms that build confidence in the securities markets that our greedy business leaders and politicians learned nothing from that corporate Chernobyl known as Enron.

The analogy is apt. Instead of attending to the victims and hunting down the culprits, like you would after any other industrial disaster, Bush immediately distanced himself from "Kenny Boy" as well as the most effective reforms, treating them all as if they were radioactive.

It's still too early to tell if Ken Lay will do time. But it's unlikely that after his case there will be much interest in going after the many others who aided and abetted the fraud - including the company's lawyers.

The cops on the corporate crime beat are still totally outgunned. Despite modest increases in the SEC's overall budget, at 913 employees the commission's enforcement division remains smaller than the biggest law firms that work for corporations. The SEC had 3,000 outstanding cases at the end of 2002, a backlog that insiders say has significantly slowed down the impetus to open up new investigations.

And as for the rights of those victims who, recognizing the government would do nothing for them. How much justice have they been able to obtain through the courts? What ever happened to the urge to "sue the bastards!"?

Apparently, it got neutralized by another Republican-corporate policy assault: Tort Reform.

White collar crime experts like Columbia University's John Coffee say securities law "reforms" passed in the mid-1990s by the Republican-led Congress (with help from Democrats like Joe Lieberman and Chris Dodd) let the aiders and abetters of fraud - the accountants, "banksters" and lawyers -- off the hook by creating a major impediment to these lawsuits.

The key statute - the Private Securities Litigation Reform Act of 1995 -- has stymied since potential plaintiffs who cannot obtain the discovery rights they need to push their case forward unless they can demonstrate fraud. But you can't prove fraud unless you have those discovery rights.

This Catch-22 is one reason why a lawsuit brought by WorldCom investors was tossed out a year before the company finally admitted it was cooking the books. If the judge - the cousin of Republican Haley Barbour -- had allowed it, maybe it would have kept WorldCom from collapsing.

Regardless, the President and his corporate allies keep griping about "frivolous lawsuits" to prepare another "tort reform" assault. (Never mind that corporations file more lawsuits than individuals, according to Public Citizen, and that 90 percent of injured people don't even file a claim, according to the Center for Justice and Democracy).

The picture doesn't look much better when it comes to addressing stock options -- the "steroids of corporate greed" that motivated CEOs and CFOs to cook the books.

No one has seriously proposed banning options. Instead, a proposal to merely require that corporations quit using accounting gimmickry to hide them -- supported by Alan Greenspan, the SEC, and hundreds of corporations who are doing so already -- has been stalled by the high-tech industry and a bipartisan coalition of allies in Congress, including Nancy Pelosi.

An SEC rule that would allow shareholders to elect their own board candidates has also been blocked, primarily as a result of aggressive lobbying by the U.S. Chamber of Commerce and the Business Roundtable. Shareholders of the companies that belong to these groups have not objected to the use of corporate funds - i.e. their money -- to fund a campaign that works against their own interests. That's a good example of just how rigged the corporate governance system is.

Apparently, the leaders of these two groups have quite a history.

The Business Roundtable is led by co-chair Franklin Raines, the CEO of Freddie Mac, which was just ordered by the SEC to restate $9 billion in earnings. As the Post put it today's top editorial, rather than following the accounting rules for futures and other financial instruments, "they behaved like a passenger who sees a "No Smoking" sign, checks with the conductor that the sign means what it says, and then nonchalantly lights up."

And the Chamber? Tom Donahue, President of the Chamber of Commerce, was on the board of Qwest when it was named the "greediest" company in America by Fortune. After Qwest's stock dropped from $96 to $2, and thousands of employees were suddenly laid off, Donahue and his colleagues thought it only fitting to pay CEO Joe Nacchio - who had already cashed out $226 million worth of stock options - a huge severance package worth $12.4 million, along with other benefits including "continued indemnification against liabilities and expenses incurred in any proceeding (to) which Nacchio is a party because of his service to us."

Why wouldn't Donahue et al. give Nacchio a "get out of jail free" card. They get theirs, too. According to Business Week, Donahue raked in at least $160,000/yr for serving on Qwest's board. Typically, directors also get an insurance policy that covers their ass, so that while President Bush might claim that in his administration "no board room is above the law," I can't think of a single board member at all the companies involved at Enron, etc. that has been charged with a crime for failing to do their job.

Anytime anyone with clout begins to try to challenge the "imperial CEOs" and their board buddies, they're likely to get scalped. That's why Sean Harrigan, the head of CalPERS (one of the most active of institutional investors), lost his position. Now that they've taken him down, the Chamber is targeting SEC chair William Donaldson, who isn't exactly the industry lickspittle that Harvey Pitt was. (Donaldson has stopped supporting the right of shareholders to nominate their own board candidates. But his failure to openly tout the Chamber line might be the issue. It's similar to the rampant ideological rigidity we are seeing in foreign policy circles.)

The amazing thing is that, even if they passed, these reforms would hardly make much difference. That's because corporate governance is ultimately a rigged game that insulates the "imperial CEO" from virtually any serious level of accountability.

For example, in the rare event that shareholders are able to pass a resolution to expense options, executives are not obliged to do so. Eighty-four of the ninety-eight shareholder resolutions that received a majority proxy vote in 2002 were ignored. Resolutions to expense options were voted up this year at Intel, Raytheon, IMB and Hewlett Packard, but ignored.

Ultimately, real power is the ability to determine what are the real issues. These proposals to reform corporate governance, while worthwhile, don't account for the fact that corporations are designed to make money, not to be socially responsible. The very treatment of Enron as a "scandal" is a concession to those who would have us forget that Enron was really the logical outcome of a corporate system whose goals - including total deregulation -are a direct assault on democracy.

When President Bush said that Enron was a "business" and not a "political" scandal, he was essentially pardoning himself and other Enron Texans like Phil Gramm (whose wife was on Enron's board) for pushing the policies that led to a variety of crimes. Of course the Democrats just as culpable, for standing by and saying nothing. (How many Dems shouted "Enron" when the gutting of PUHCA was inserted into last year's energy bill?)

When we think of deregulation, rather than thinking of market-based efficiencies, we should think of the dismantling of structural restraints on the corporation and the sacking of the cops who police the corporate crime beat. That's what deregulation is all about. (It's easier in a one-party system. The goal that unifies Republicans and corporations is the repeal of the New Deal.) We can't blame corporations for pushing for their self-interest (and pretending that its for the welfare of others). We have ourselves to blame for not fighting back.

As Nomi Prins suggests in her new book, Other People's Money, and we explain in The People's Business, it's no accident that the recent epidemic of accounting fraud and other abuses primarily involved companies in three sectors -- banking, energy and telecommunications - because these are sectors that had been aggressively deregulated throughout the 1990s, through the repeal of Glass-Steagall, the gutting of PUHCA and the Telecommunications Act of 1996.

Until we address the inherent conflicts of interest created by deregulation, the lack of checks and balances caused by tort reform and the incentives created by outrageous executive compensation packages, we will likely see all kinds of white collar and corporate crime in the coming years.

Charlie Cray is the director of the Center for Corporate Policy ( and co-author of The People's Business: Controlling Corporations and Restoring Democracy (Berrett-Koehler, 2004).


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