The Best Policy

The Wall Street Journal’sFraud Blindness

The newpaper’s preposterous editorial about AIG and me.

I have tried not to say too much about former AIG CEO Hank Greenberg’s efforts to dance his way through his $15 million settlement with the SEC. Greenberg’s troubles largely derived from a case brought by the New York attorney general’s office when I was attorney general. As has been widely reported, AIG settled the case with my office in 2006 by restating its financials, paying a fine of $1.6 billion—at the time, the largest in history—and separately, by removing Greenberg as CEO. Thereafter, five people were convicted in federal court of criminal charges, and the prosecutor in that case referred to Greenberg as an “unindicted co-conspirator.”

Yet in a quite remarkable editorial on Friday, the Wall Street Journal editorial board, in another of its apologias for boardroom fraud, once again tried to clear Greenberg of all blame, asserting that I began the destruction of AIG by demanding Greenberg’s removal as part of a misguided effort to ensure accuracy and integrity in AIG’s financials.

While it’s nothing new for the Wall Street Journal editorial page to make such a claim, one sentence in the editorial is rather startling, even for them: “AIG shareholders appear to have been hurt far more by the company’s 2005 Spitzer-driven earnings restatement than by Mr. Greenberg’s alleged failures. …”

Excuse me? Weren’t Bernie Madoff’s investors better off before he was forced to “restate” income as well? Of course they were! That is the nature of fraud that benefits investors! So is it better to leave the fraud undetected and unprosecuted? If one buys the Wall Street Journal’s logic, integrity in the marketplace is merely a utilitarian calculus: If remedying the fraud costs shareholders more than the fraud generated in value, then the fraud was permissible and even desirable. The Journal’s total lack of interest in the integrity of the market as a fundamental principle is finally but tellingly revealed.

The Journal’s argument ought to be easily dismissed as merely the perspective of a remnant few who haven’t recognized the harm caused by fraud in the market. But I have the troubling sense that now that we are back from the brink of the financial precipice, we are reverting to the status quo ante. When a major newspaper can print such an editorial, it makes one wonder whether we have learned anything at all.