White Collar Crime

Yesterday we explained that Bruce Wayne–who fights street crime and evil clowns by night–has all the markings of a corporate criminal. We even went so far as to explain that Wayne seems like exactly the “better class of criminal” that his nemesis The Joker claims Gotham City deserves.
Some of you fanboys disagreed!
But it turns out we’re not alone in seeing the criminality of Bruce Wayne. Smart lawyers and law professor types agree with us! And it’s not just criminality: Wayne–and his Batman alter-ego–bring up a whole host of legal issues. After the jump, a quick summary of Wayne’s white-collar criminality and litigation inviting ways.

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insider_trading graphic.jpgThat was quick.
Just yesterday we worried that our optimism about the tide turning against the war on white-collar crime might be misplaced. The Wall Street Journal had just won a Pulitzer Prize for its sometimes misleading “gotcha!” reporting on backdating. We hoped that the backlash against the scandalization of backdating might provoke some rethinking about criminalizing corporate executives.
“I think that it’s more likely that the Pulitzer itself will just spur more Watergate-itis in business reporting,” Ideoblogger Larry Ribestein wrote. And a part of us feared that Larry was right. We might be in for a very long haul of journalists, regulators and prosecutors marching against what they see as rampant greed and theft in corporate board rooms and executive suites.
But we hadn’t seen the most recent issue of The New Yorker yet. James Surowiecki, the guy employed by magazine to explain finance to its readership, has a relatively balanced article that echoes a lot of the sentiments expressed here and elsewhere about the criminalization of business going too far.

Sending executives to prison for bad judgment is costly, not just for the C.E.O. but also for the economy as a whole, because it discourages other executives from taking reasonable risks. So we do need to be careful about criminalizing agency costs, to use a phrase coined by Larry Ribstein, a law professor at the University of Illinois.

Surowiecki warns that caution about criminalization need not involve the wholesale rejection of prosecuting white collar criminals. Of course it does not. What academics like Ribstein have been calling for is not immunity for genuine thieves but a re-assessment of the costs and benefits of what seems to have been an abandonment of reasonable caution in the past decade.
The quibble aside, it’s certainly reassuring to see these ideas in a middle-brow, mainstream magazine like The New Yorker. Perhaps our hope wasn’t so misplaced after all.
Free Agents[New Yorker]
Surowiecki on criminalizing agency costs [Ideoblog]

TheConMan_large.jpgAnother hedge fund scammer has been caught allegedly posting false gains while he burnt lost investors money on questionable investment, the Washington Post reports today. The latest accused hedge fund con-man and his Canadian partner Stephen Chesnowitz had a unique way of getting investors—they took them out to lunch!

Over the past two years, the two traders sent out mass mailings advertising a free “gourmet meal” and the opportunity to “earn excellent returns with a guarantee against market risk.” More than 150 people, mainly from Montgomery and Prince George’s counties, attended the seminars and gave Williams a total of $9 million. He transferred the money to Chesnowitz’s hedge funds in Canada and the Cayman Islands.

As always, the way to a man’s wallet is through his stomache.
William’s “investments” included a Canadian bed-and-breakfast and two vintage cars. Presumably one for himself and the other for Chesnowitz. After posting phony gains on his website, Williams allegedly took a standard 20% hedge fund commission on the gains. Nice work if you can get it.

Hedge Fund Manager Charged in Fraud
[Washington Post]

  • 10 Jan 2007 at 2:38 PM
  • Enron

Questioning The Enron Case, Day 8

freejeffskilling.jpgIt’s been eight days (or so) since Malcolm Gladwell’s article in the New Yorker got people talking about Enron again. Consider the Enron case officially re-opened. And by “officially” we mean “under debate on the interwebs.” So it’s not legally re-opened but there is at least a chance that the public understanding of Enron might begin to change from one dominated by The Most Evil Guys In the Room image to something a bit more reality based.
Tom Kirkendall takes on Enron prosecutor John Hueston’s recent contentions to task today. It’s a long post that deserves to be read all the way through. But since you’re busy, here’s Kirkendall on the claim that Jeff Skilling manipulated Enron’s earnings.

Moving on to Hueston’s other allegation against Skilling, the evidence that Skilling engaged in earnings manipulation is so sketchy (see more extensive discussion in the earlier comprehensive post) that Hueston resorts to attempting to tie Skilling to the alleged Global Galactic agreement between Fastow and Causey. Revealingly, only the non-believable Fastow testified during the trial that Skilling knew about Global Galactic and, even after Causey copped a courthouse steps plea deal to hedge the risk of the effective life sentence that Skilling received, the Task Force chose not to call Causey as a witness. More than likely, the reason that the Task Force did not call Causey is that Causey wouldn’t have corroborated Fastow at all, which raises a quite reasonable question — why did the Task Force prosecutors used Fastow’s testimony to convict Skilling when they knew that there was reasonable doubt about Fastow’s veracity? Indeed, what does Hueston have to say about the Task Force’s duplicity with regard to Fastow’s testimony during the Lay-Skilling trial? And again, what does Hueston have to say about the numerous witnesses who the Task Force effectively prevented from testifying who would have provided exculpatory testimony for Skilling and refuted Fastow’s testimony?

Your move Hueston.
Reacting to Gladwell’s Enron article [Houston’s Clear Thinkers]

davidstockman.jpgDavid Stockman is under investigation for his role running Collins & Aikman, an autoparts company. You might recall the name Stockman. it became a household name when he was appointed budget director in the first Reagan administration. Before that he had been a member of Congress with a reputation for being allied with the tax-cutting supply siders.
Shortly after he started working on the Reagan budgets he voiced his complaints about the budget process built around cutting taxes while deficits mounted to a reporter named William Greider, and that conversation became an article titled “The Education of David Stockman.” Despite the scandal of this article, which referred to the supply-siders tax-cuts as a “Trojan Horse,” Stockman managed to stick it out in the administration for several more years. After leaving in 1986, he published a book claiming that the “Reagan revolution” had failed because Congress had refused to embrace spending cuts.
After leaving politics, Stockman spent the next dozen or so years running around the finance world, first at Salomon Brothers then at Blackstone. Eventually he left Blackstone to start his own private equity firm, Heartland Industrial Partners, L.P., which specialized in buying up companies in decidely unfashionalbe industries, especially the auto industry. A few years ago, Stockman installed himself as CEO of Collins & Aikman. And, apparently, that’s where the trouble really started.
From the New York Sun:

Federal investigators and prosecutors are preparing a case against Mr. Stockman and other corporate officers from Collins & Aikman and expect to present the findings soon to a grand jury in New York City, the official said.
The investigation is focused on whether Mr. Stockman and other corporate officers at Collins & Aikman misled investors about the financial health of the company by artificially inflating stock prices. ABC News reported on the case Monday.

Reagan Official Is Investigated For Possible Fraud [New York Sun]

  • 16 Nov 2006 at 9:24 AM
  • Enron

The Enron Guy You Never Heard Of Gets 5 1/2 Years

richard causey.jpg
Is there some special shame that attaches to being convicted in one of the biggest financial scandals of the era and yet still being a nobody? Probaby not. If he took the Ken Lay out, we’re betting he’d just end up in whatever ordinary Hell accountants usually go to.

Former Enron Corp. Chief Accounting Officer Richard Causey was sentenced to 5 1/2 years in prison for his role in the fraud that destroyed the company, an 18-month reduction from the term offered in his plea deal.
Causey, 46, was charged with more than 30 counts and faced trial alongside former Enron Chief Executive Officers Kenneth Lay and Jeffrey Skilling, both convicted in May of spearheading the fraud that forced the company into bankruptcy in 2001. Skilling was sentenced to 24 years in prison. Lay’s conviction was thrown out because he died before his appeal.

Former Enron Accountant Causey Gets 5 1/2-Year Term

Look, You Knew I Was A Snake When You Gave Me Your Money

In retrospect, perhaps investing in a hedge fund named for a poisonous snake wasn’t such a good move.

The Securities and Exchange Commission yesterday sued a San Francisco hedge fund manager, Edward S. Ehee, and the funds that he managed, Viper Capital management and Compass Fund Management, accusing him of fleecing 18 investors out of about $5 million.
Mr. Ehee raised the money from investors, including a neighbor who gave his children’s trust funds to Mr. Ehee and the neighbor’s mother-in-law, who invested her entire retirement savings in the funds, according to the complaint.
Rather than invest the millions he raised, Mr. Ehee gave the money to family members and used it to pay for his mortgage, his cars and vacations in Las Vegas, the complaint says.

S.E.C. Accuses Hedge Fund Manager of Deceiving Investors [New York Times]

Kozlowski Finally Sells Ski Spot

kozlowskimask.jpgCome on. You know you’re hoping the “unidentifed Texas oilman” is the ghost of Ken Lay.

Disgraced corporate tycoon Dennis Kozlowski sold his opulent Colorado mountain mansion for $10 million – and got an extra $750,000 for the furnishings, court papers revealed yesterday.
An unidentified Texas oilman agreed to plunk down the giant chunk of cash for the ex-Tyco mogul’s 8,627-square-foot palace, complete with a heated driveway, three wine cellars, two hot tubs and a stuffed mountain lion.
“At 10 million, it’s a decent house, although some people I talked to thought it wasn’t worth more than eight,” said David Nilges, a real estate broker not involved in the sale. “The view is to die for.”
But Kozlowski, who is serving 8-1/3 to 25 years in prison for looting up to $1 billion from Tyco, won’t be pocketing a dime from the big deal.
Kozlowski will use the proceeds to chip away at the $59 million in outstanding restitution he still needs to make. He has already turned over more than $100 million.

Ex-Tyco looter sells mansion in snowy Colo. for cool $10M [New York Daily News]