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Balanced Fare: We Report, You Deride

Wednesday, February 12, 2003



Beyond Mere Mortal: Ken

Dr. Manhattan reads the NY Times story about Ken Lay and sets the blogosphere on fire. Ken Lay not a dastardly, deceitful villain? Mickey, Andrew, and Donald Luskin concentrate on the suspect reporting at the NY Times. In fact, Mr. Luskin points us to a NY Times story describing the "margin loan" defense that was published just three days after the Times first aired its suspicions about Mr. Lay's stock sales. The Man Without Qualities reprises P Krugman's greatest hits on Enron, in this post and this follow up.

So, is Ken Lay innocent? In the oft-repeated words of Gene Hackman, innocent of what? I am not a securities lawyer, so let me offer you my opinion about securities law. There seem to be two separate issues here - did Ken Lay lie to the public, and did he believe his own lies? Suppose, as the the Times reports, Mr. Lay never wavered in his confidence in the long run prospects for Enron. He might still have tolerated a bit of financial chicancery to ease the company past a temporary glitch, or what he might have perceived as a brief soft spot in the financial markets. However, I don't believe that securities law allows for a "white lie" defense: "Hey, I was sure the shares would recover eventually, I knew you would thank me later, so I lied to you now".

This Business Week article mentions Ken lay's legal challenges without any reference to his own sale of stock, which certainly suggests that the public statements and his personal stock sales are separate issues.

Now, his personal stock trading pattern may be indicative of a state of mind, and lend support to the position that he did not know about the accounting situation at Enron. Certainly, a prosecution would be easier if Mr. Lay had been selling shares frantically, rather than reluctantly. A case against Mr. Lay was always going to be problematic, since he could point to legal and accounting opinions validating the various corporate transactions in question. Take away the notion that this was a scheme designed for his personal enrichment, and what is left? But his pattern of stock sales is not definitive proof that Mr. Lay believed that nothing was wrong at Enron - it may simply demonstrate his belief that the problems would eventually be overcome. If ham sandwiches can be indicted by a motivated prosecutor, why not Lay's potato chips?

Incredibly, it seems, from the examples cited, the Krugman may be able to skate over this thin ice to claim vindication. Groan. From the Krugman examples offered at the "Man Without Qualities":

Time magazine's persons of the year are three whistle-blowers: Sherron Watkins of Enron, Cynthia Cooper of WorldCom and Coleen Rowley of the F.B.I. They deserve to be celebrated. After all, thanks to Ms. Watkins ... Ken Lay .... ha[s] been indicted.... Oh, I'm sorry. None of that actually happened. ... Time seems to be celebrating what should have been, not what was.

This is priceless - so often I find myself asking, is this true, or did Krugman just read it in Time? However, an eventual indictment, as noted, may be based on evidence other than his stock sales.

This followed:

Enron executives may have deluded and defrauded their shareholders without actually breaking the law. ... [T]he absence of Enron indictments, demonstrates just how much self-enrichment corporate insiders can get away with while staying within the letter of the law."

And again, time will tell.

Last example:

[T]he use of "split-premium" life insurance policies ... give[s] executives largely tax-free compensation (you don't want to know the details) — is an even sweeter deal for executives of companies that go belly up: it shields their wealth from creditors, and even from lawsuits. Sure enough, reports The Wall Street Journal, former Enron C.E.O.'s Kenneth Lay and Jeffrey Skilling both had large split-premium policies.

Same argument.

OK, I'm back for a day and defending Krugman against both The Man Sans Q and Andrew Sullivan. Fortunately, I am due for another vacation soon.


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