A couple of months ago, Daniel Henninger of the Wall Street Journal had the following striking headline to his weekly essay—“Barry Bonds, Please Meet Andrew Fastow”—a clear reference to the common thread that runs through the fraud manifest in both cases. The point is that there is a condition that transcends enforcement and prosecutorial methods such as drug testing in professional sports and Sarbanes-Oxley laws in corporate governance, which is the breakdown in the code that has restrained private vices and sustained the moral order of successful societies over the centuries. What happened to this code which defined and disseminated our common sense of right and wrong? That’s a long story, but the end result has been the relegation of morality to matters of personal choice and “privacy” and its removal from instructional methods that once were widely available in the public square, but that have been slowly eliminated by the politics of tolerance and relativism. This is probably the most instructive lesson of the Enron case.At its outset four years ago, I noted that the market had worked its discipline and exacted its penalty in the Enron collapse, and that the case should not be used as an excuse to roll back or impede deregulation, re-regulate the electricity markets, halt the privatization of Social Security, or spawn tighter controls on 401k plans. Well, what we got was Sarbanes-Oxley, which has already produced ample evidence of the usual Congressional over-reaction, and is showing signs of a dampening effect on U. S. capital formation due to its onerous compliance burden on management, particularly of small and mid-size growth companies. Another lesson, and one we should have learned long before Enron.
A third lesson should be the warning signs from the prosecution methods used in this case, which have been touted by The Houston Chronicle as innovative “new tools to defeat corporate felons”. Characterized as enhanced “cooperation” by corporate management with federal prosecutors, these new tools include waiving attorney-client privilege, refusing to pay attorneys fees for individual suspects, and appointing independent monitors who participate in corporate strategy while reporting to the government. The quid pro quo for this cooperation is supposedly the avoidance of the fate of Arthur Andersen & Co., the venerable firm which was destroyed by its indictment (later thrown out by the courts) by prosecutors as a by-product of seeking out individual culpability among its partners in the Enron debacle. To me, this new approach smacks of serious prosecutorial over-reach, and will have further chilling impact on corporate innovation and capital formation over time. We would be better served by having more of the time and effort of this bright legal talent applied to the legal and political means by which a strengthened moral code can be restored to the public square, but in the current climate that’s pretty naïve thinking.