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Commentary: The Skilling Trap


"Obviously I'm disappointed. But that's the way the system works."

Let this be said for Jeffrey K. Skilling: On the steps of the courthouse, walking out of his trial into the prospect of decades of imprisonment, he stayed in character. He did not say that he was robbed of justice or express regret or defiance. He proved himself, considering the circumstances, a maestro of emotional detachment. For all his arrogance, there has long been an air of fatalism around Skilling, a great tiredness. He told the jury that Enron was his life for years, but by the end it was a life he didn't want. The short period after he quit Enron and before the scandal broke, Skilling said on the stand, "were the happiest three weeks of my life." Some of what comes through in Skilling's laconic understatement is deep exhaustion.

But there's more to it. "That's the way the system works." It's a strange thing for a man to say who has been convicted of 19 separate criminal charges. Reduced to words on a page, you can imagine the tone to be bitter or accusing. But it's not. Nor is it gallows humor, a tip of the hat to the prosecutors who won their case, but something more poignant. Along with his encounter with his former underling, the shackled Ben F. Glisan Jr., in the courthouse elevator, this may have been one of the two truly moving moments of the trial.

Somehow for Skilling it all made sense. In the courtroom he had a role to play, the part of the defendant, and he played it to the best of his abilities. But outside, he could shed the burden of that role and stop trying to justify himself. That's the way the system works. For Skilling it was not a matter of justice or injustice, even when it was his own future at stake. We all play our parts, he seemed to mean, and the rest will take care of itself.

It is a supremely characteristic statement, and it evokes the essence of what went wrong at Enron. Skilling had a startling confidence in what he thought of as "the system," a strange and even endearing belief in the mechanisms -- the letter and only the letter -- of the law.

The Enron trial was at heart about the difference between the letter of the law and its spirit. It was the most complicated of the half-dozen or more big corporate corruption cases that have come to trial, not just because of the scope of the meltdown, but because the fraud at Enron was accompanied by the most obsessive and careful concern for the letter of the law. That was the point of all the partnerships, the "Raptors" and "LJMs." The people who ran Enron did back flips and somersaults as they tried to stay within the law's lines. The minimum ownership by outside investors. The endless discussions of hedging risks. The internal discussions about managing conflicts of interest.

Looking at the trial transcript, it's possible to suspect that Skilling lost his case in the first moments of his cross-examination. "The bottom line of all this, Mr. Skilling," demanded prosecutor Sean M. Berkowitz, "is that you and Mr. Lay were the captains of the ship at Enron, weren't you?" "Yes," Skilling meekly answered. You almost wish that he'd have put up more of a fight, because to bring the case to a "bottom line," a simple decision about right and wrong and responsibility, represents the very opposite of the Skilling philosophy. A trial by definition is about the letter of the law, but in starting the way he did, Berkowitz pointed out that you can't reliably interpret the letter without talking about its spirit as well. That was the thing Skilling couldn't see.

But if the prosecutors won inside the courtroom, it's worth asking if outside it we live in Berkowitz' world, or Skilling's. On this, as they say, the jury is still out.

In the wake of Enron, there has been an overhaul of the securities laws. Enron is the reason we now have chief executives lining up to sign sworn certifications of their financial statements. But what made Enron possible was not a lack of rules. It was an unwillingness to think about regulation and responsibility in any but the most legalistic terms.

Enron came out of a market boom in which we started mentally dividing our neighbors into Suckers and Players. The Players were the ones who could score big in the equity markets and the Suckers were those who couldn't, or didn't try. In the stock market boom, it became widely understood that while actually fibbing on your company's financial statements was not kosher, senior executives could sell their preposterously overvalued stock with abandon and we wouldn't hold it against them. In just six months in 2000, Skilling himself cashed out $47 million in Enron stock, yet the jury acquitted him of all but one insider trading count. Even as they convicted him of lying, the jurors managed to acquit him of the charge of reaping the fruits of those lies.

This is the kind of fine distinction we have all now gotten used to making. The legacy of the stock market frenzy is that it does not faze us at all that one man in six months can sell $47 million in stock as his company goes down the tubes. Like the jury, we make these careful calls: Can tens of millions of dollars in profits be linked to a specific misrepresentation made to investors, or is it just the good fortune of a chief executive who happens to be running a company mistakenly loved by the markets? The first is a crime. The second we are ready to excuse as just the ordinary course of business. If anything, we have gotten even more used to top executives getting huge stock grants and regularly selling off millions or tens of millions of dollars' worth of shares in the interests of "portfolio diversification."

The social strictures that once kept business in check -- the stigma once attached to selling your own company's stock or the troubling appearance of cashing in on huge holdings -- largely disappeared in the era of the stock market boom, and they haven't returned. The people tasked with "building shareholder value" sell millions of shares of stock at a sitting; we no longer bat an eyelash, and consider it nothing to be ashamed of. If that doesn't matter to us, the spirit of the law becomes hard to recall.

A Collection of Loopholes

The original sin of high-level corporate crime isn't in the details of accounting rules. Skilling might have gotten a pass on insider trading, but there's little question that the source of all the crimes of which he was convicted was the basic dishonesty of trying to keep the company's stock afloat so he could make more money. For Kenneth L. Lay, who hid big stock sales in a complicated accounting maneuver, that motivation is even clearer. The essential message of the securities laws is that CEOs shouldn't get rich while their shareholders go broke. Forget that, and they're just a collection of loopholes.

The potential for huge gains from financial engineering has over the past two decades migrated from Wall Street to the rest of the business world. The savings and loan crisis of the '80s was the result of hundreds of small-time operators thinking of themselves as financial Players. Now big company chiefs throughout the business world think of themselves that way. Many are speculators in their own stock -- Skilling took the extra step of shorting a competitor's shares -- looking for the right moment to cash out.

No question, the parade of executives in handcuffs will have some deterrent effect. But the evidence that any of this will make executives more accountable and more honest rather than just more careful is thin. Contemporary business culture accepts outsized compensation as a given and takes for granted the notion that chief executives have no special responsibilities more pressing than ensuring a fabulously wealthy retirement. In such a culture it's certain that when the market next crests and crashes, hundreds of corporate executives will at least toy with ways to make the numbers look good until they can get their own money out. After Enron, those who go that route will be more cautious in interpreting the law. Can that prevent the next wave of scandals? No, because no reading of securities law is so careful that it avoids the Skilling trap: When you try to keep to the letter of the law while undermining the spirit, you are likely to violate the letter in the end.

By Mark Gimein


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