The Enron Standard
April 13, 2006
Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
The blockbuster Enron trial is far from over, and things are not looking up for Skilling and Enron founder Kenneth Lay, both of whom could face 25 years in prison if convicted on fraud charges. Government prosecutors presented 22 witnesses over 32 days, building a solid case that Skilling and Lay knew full well that Enron’s finances amounted to house of cards build on a foundation of fraud, yet continued to make bold (and untruthful, hence illegal) proclamations about the company’s financial health.
Such a painstaking prosecution has been four years and millions of dollars in the making, and has ensnared more than a dozen co-conspirators along the way. And while it is heartening to see what government prosecutors are capable of when they set their minds to it, Enron represents a mere drop in the bucket in the wide world of corporate crime.
When it comes to government follow-through in punishing corporate crime, Enron is a true shining star. Unfortunately, the rest of the universe is rather dim—particularly when it comes to crimes where the victims don’t happen to be wealthy investors. Consider a recent Associated Press report that studied how well government agencies were doing in collecting fines levied on white-collar and corporate criminals. The AP’s answer, in short? Not well at all.
According to the report, the federal government is now owed $35 billion in fines—five times the amount that went uncollected 10 years ago, and enough to fund the entire Department of Homeland Security for a year. According to a Government Accountability Office (GAO) report, in cases involving white-collar and corporate criminals, on average just 7 percent of the initial fine actually gets paid.
The report makes for depressing reading. Case after case of government agencies making big public charades over big fines, only to later cut those penalties dramatically—or not bother to collect them at all.
There is, for example, the story of the gasoline company that paid only 8 percent of an original $3 million fine after an explosion killed three young people. There are the nuclear labs let off the hook after a $2.5 million fine was imposed for exposing workers to radiation, and the coal companies allowed to walk after being fined $1.3 million for deaths and injuries to miners. Company after company, it seems, is being told that there are no penalties for their actions.
Quite a contrast to the zeal that prosecutors have demonstrated in going after Enron.
Now, I would not for a moment suggest that federal prosecutors should not be pursuing the Enron case with all the force in the world. Enron remains one of the most spectacular corporate frauds ever, and to let the folks who cooked it up off the hook would be a travesty of justice.
But at the same time, I also think it’s important to take a step back and remember what it is that Lay and Skilling are being prosecuted for. They are being prosecuted for bluffing about the financial health of their company—which allowed them to make off with millions by selling their stock high while unwitting investors were left holding the bag.
This is a serious crime, and it is true that many Enron employees had their whole pensions in Enron stock and subsequently lost everything. But it is also true that the roughly half of the stock out there is owned by the wealthiest 1 percent of Americans. As far as classes of victims go, investors tend to be a pretty privileged class.
Perhaps, then, it is not surprising that the face of “corporate crime” has come to be defined largely by Enron, WorldCom and other cases of accounting fraud where the victims are primarily wealthy investors. Nor should it seem surprising that corporate reform and corporate accountability is still largely discussed in reference to the Sarbanes-Oxley Act, which dealt almost exclusively with curbing accounting fraud. After all, investors are a pretty powerful political class.
Yes, financial fraud is a serious crime; and yes, reforms are needed and violators ought to be pursued with the full force of the law. But all this must not distract us from the fact that when the victims are not wealthy investors, the same force of response is often lacking.
Consider the Sago mining disaster, which claimed the lives of 12 miners on January 2. The event drew plenty of media attention for a little while, and plenty of disapproval was heaped on the mine’s owners, which, as it turned out, had been given many “serious and substantial” violations in the past (though never with serious fines to match). But almost three months later, the prospects of actual improvements in mine safety regulation now seem dim.
Workplace safety is an ongoing problem, and not just in mines. According to Bureau of Labor Statistics, more than 5,500 workers are killed on the job each year (an average of 15 per day), and another 4.7 million suffer serious injuries.
As the AP report reminds us, most corporate criminals are still given kid-gloves treatment. Sure, financial fraud now gets punished with almost as much force as an under-funded Justice Department white-collar unit can muster—as it should. But when it comes to issues like the environment, health and safety, it seems that the Justice Department seems content to let companies pretty much do as they like.