Lay and Skilling Aren’t the Only Guilty Ones

Have CEOs learned nothing from the Enron scandal?

Just minutes before the verdict in the Ken Lay/Jeffrey Skilling trial was announced, CNBC anchor Bill Griffeth asked former SEC Commissioner Laura Unger whether it would, once and for all, bring down the curtain on the corporate scandals of the 1990s. A dutiful guest, Unger replied: “I think this is the final page of the chapter.”

The exchange neatly set up what is likely to be the business world’s reaction to the trial’s resolution. Guilty or innocent—and guilty, guilty, gloriously, undeniably guilty, as it turned out—the Houston jury’s verdict would finally end the scandals that cascaded through the markets in the wake of the 1990s stock boom: Enron, WorldCom, Adelphia, Global Crossing, Tyco, ImClone, and so many others. The upshot: Nothing to worry about anymore, it’s safe to buy stocks. And you can bet that CEOs and the Wall Street Journal editorial page will soon be telling us that, now that the evildoers have been rooted from the system, it’s time to scrap Sarbanes-Oxley and other post-scandal regulation.

It would be nice if this vision of a sparkling clean corporate America were true. It would also be nice if everyone could have a pony. Alas, the accounting games and executive-compensation excess that began in the 1990s are still very much with us. Some of the most obvious offenders have been caught, but huge amounts of corporate corruption remain.

Consider what’s been making the headlines in the business press. On Monday, the Securities and Exchange Commission levied a whopping $400 million penalty on Fannie Mae to settle charges that the mortgage giant fudged earnings between 1998 and 2004 so that executives—including former CEO Franklin Raines—could receive larger bonuses. The accounting problems persisted well into the Sarbanes-Oxley era. And as news reports note (see here, and here), current CEO Daniel Mudd, appointed to succeed Raines in a 2004 housecleaning, was singled out for failing to take employee concerns about accounting problems seriously.

The biggest business news story of recent weeks is the Wall Street Journal series of reports on options backdating. It hasn’t received wider play in part because the pieces remain behind the Journal’ssubscription firewall. But lead reporter James Bandler, working with number-crunching academics, unearthed several instances in which companies, including blue-chip firms such as gigantic insurer UnitedHealth, repeatedly granted options to top executives on days when stocks were at or near their low points for a quarter or year. Between 1995 and 2002, for example, the CEO of Affiliated Computer Services received six options grants at times when the stock was poised to rally after falling. The odds of such a propitious set of options grants were calculated at one in 300 billion. The article helped set off a series of federal investigations and has already caused the resignation of two CEOs. Yet until enterprising journalists and a few academics pointed out the problem, Wall Street’s highly paid analysts and the beefed-up Securities and Exchange Commission enforcement division hadn’t noticed anything amiss.

Clearly, the bugs in the system remain. Consider Refco, the commodities trading firm that didn’t even begin to think about going public until a few years into the Sarbanes-Oxley era. If any company should have been thoroughly vetted before going public last summer, it was Refco. Star private-equity investor Thomas H. Lee was on the board and owned a big chunk of the firm. Goldman Sachs was among the underwriters. Three of the whitest of white-shoe law firms worked on the offering. And yet Refco collapsed and went bankrupt within two months of its $583 million IPO amid allegations of accounting fraud.

Finally, as we labor to congratulate the efficient marketplace on rooting out bad actors, we should bear in mind that Michael Kinsley’s law applies as much on Wall Street as it does in Washington: “The scandal isn’t what’s illegal; the scandal is what’s legal.” And the prevalence of perfectly legal shenanigans should be sufficient to make us realize that a few years of Sarbanes-Oxley and these Enron verdicts haven’t served to clean up the governance of publicly held companies. Just surf over to Michelle Leder’s blog,, which provides a steady stream of executive-compensation outrages. Or check out Julie Creswell’s front-pager in yesterday’s New York Times on the web of cronyism, back-scratching, underperformance, and overcompensation at Home Depot. Thanks to a lap-dog board, CEO Robert Nardelli has been paid $245 million in the last five years, a period in which the stock has fallen, underperformed the broader indices, and been crushed by rival Lowe’s.

As Jeffrey Skilling put it, in somewhat different circumstances this afternoon: “That’s how the system works.”