Man in the Street: Why Not Prosecute CEOs?

This morning I was a guest on FOX Business Network. FOX provided a car and driver to take me to the studio. The driver immediately started quizzing me on what I was going to talk about on television. When I told him I would discuss banking and public markets and that I am a former lawyer, he demanded to know “Why isn’t the government prosecuting corporate executives whose companies have made bad disclosure to shareholders?”

The driver was very clear that he believed corporate CEOs and CFOs violated the law by misleading shareholders, and he didn’t understand the government’s reluctance to prosecute anyone involved in bad and misleading disclosure. He particularly thought that bank executives had abused the public trust and deserved to be prosecuted. The driver said that after Enron he figured things would be better and the middle class would be treated fairly by Wall Street. He repeated several times that “brokers for a commission will do anything” and that CEOs were “screwing the little guy”.

For a while I didn’t know what to say and couldn’t answer him. My driver’s common sense questions and analysis seemed correct.

After a while I told the driver that the SEC needs to enforce the securities laws in a diligent, deliberate and disciplined manner. I stated that the integrity of the financial system depends on small investors trusting the market, government, banks and corporate executives. I told the driver that the United States has a “social contract” between and among its citizens and the government. And, some of the contract’s basic tenets are that all people are created equal, the law applies equally and fairly to all citizens and that government will make sure that there is a “level playing field” between the little guy and big corporate interests.

The driver said that small investors think the system is dishonest and that they can’t invest without worrying about being ripped off. And, he asked why the screwing of the little guy isn’t a violation of the social contract. By the time I got dropped off at the FOX studios we agreed that the current banking and credit crisis has as its root cause a violation of the social contract, and that the crisis has the potential to not only undermine the United States economy but damage society for generations. And we agreed that the government should enforce the law and make sure that bad corporate executives are punished for their behavior.

As anyone who knows me realizes, I have been a constant critic of both the Bush administration and the banking and securities regulatory agencies. I have spoken out on TV and I have written about this issue in my blog. As I wrote on August 3,

In my first year of law school I learned why enforcement of criminal and civil law is essential for the United State’s social and economic functioning. Apparently, the elite lawyers of the Bush Administration didn’t learn the same lesson since they have a non-existent enforcement policy which has made the US financial markets a Petri dish of illegal and immoral behavior. The SEC, Justice Department and banking regulators’ tolerance for unethical business behavior and blatant disregard for the law is the root cause of the current credit crisis. Without a radical change in enforcement policy by the next President, the last 7 years of mistakes will be repeated.

This week SEC Chairman Cox will announce a replacement web site for EDGAR. While a new system is needed, I think that the SEC is focusing on “form over substance”. A new web site isn’t what is needed to fix incomplete and misleading investor disclosure. After the new web site is up and running disclosure will still be defective because the information that is being disclosed will still be unreliable and incomplete. Cox’s solution to the disclosure problem confirms the adage “garbage in – garbage out”. It is a shame that the crowning achievement of Cox’s tenure at the SEC will be a new web site rather than better substantive investor reporting.

My driver told me that he hoped that the next President takes his responsibilities more seriously than Bush. When I got out of the car we both agreed that our children’s futures depend on it.

Comments

[Fish Gone Bad:]

I agree completely.

I would like to add that companies that go after whistle blowers and informed individuals (like David Einhorn), really really need to be punished for trying to stifle free speech.

I hear over and over again how (naked) short sellers are destroying companies, but no one offers proof. The companies that complain the most, usually have the most to hide.

Clark Jenkins
FishGoneBad.com

2008 Aug 20 11:55 PM

[David Martin:]

My view would be that the way to ensure corporate and legislative good behaviour is to punish past misdeeds heavily.
Unfortunately the establishment is good at giving each other free passes.
Cheney would be a good place to start, with his pushing business Halliburton's way and acting in apparent disregard for his legal powers.
The insider trading which led many top executives to trade in their shares options just before their shares nosedived is another.
Without going too far into retrospective legislation, surely it would be possible to try those who have awarded themselves huge severance bonuses when their companies are failing of lack of due diligence, together with those who authorised them.
Should the borderline of retrospective legislation be pushed, then intense tax investigation on those individuals who have grossly profited, especially those in charge of FF and FM should yield dividends.
It is entirely unacceptable that those who will suffer should be those made homeless and thrown out of work, whilst those responsible make away with the loot.
Steps should be taken to ensure they join the bankrupt and homeless.

2008 Aug 21 09:19 AM

[cageordie:]

It took a taxi driver to bring this to your attention? Haven't you been reading the news in the last five years? The wanted poster for my former CEO graces my office wall, but he's safe and sound in Sweden with the millions he stole from the company. Even worse for the company, we, and effectively all those small share holders, were fined by the SEC for his misdeeds and had to pay for the former execs lawyers. So we were swindled and fined for the pleasure. But you knew this already, you know how the scam works? Right?

2008 Aug 21 10:39 AM

[jackooo:]

cageordie
You said it like it is. I salute you.
The key words are, "DID NOT ADMIT GUILT".
The shareholders indirectly paid the fine.
The S.E.C. is a joke on us.

2008 Aug 21 11:46 AM

[gap:]

This article by Mark Sunshine points the finger at the right parties responsible for our FINANCIAL chaos. Our poliicemen (FED, eSEC, etc) are not punishing the criminals. The financeers should be held accountable. That will reduce the fraud. My frustration is with the phony financial statements being published by the SEC for the financial companies.. Obviously the true value of financial assets are being overstated and the reserves for losses are understated.

2008 Aug 21 12:05 PM

[LAD:]

Mark,
I always considered myself a most patriotic US citizen and proponent of the free enterprise system. I have been naive. Michele Obama was correct in her statement regarding her dissatisfaction with the direction America is taking. She should have stuck to her guns and said it like it is "ashamed of our government and the lobbiests who run it".

I see only a revolution as a possible means to right this ship. Our elected officials have no goals except to raise money and get elected so they can sit and do nothing. I am glad I can no longer afford to travel to Europe and be embarrassed in front of our global neighbors.

Obviously I am in full agreement with your article - the SEC is useless, and congressional oversite is non-existent.

2008 Aug 21 01:01 PM

[ain't no fo...:]

Cox... the guy who has intentionally looked the other way and for many years let hedge funds spawned by his pals the investment bankers trash hundreds of companies of all sizes (and tens of thousands of small investors) via naked shorting, and who selectively stopped naked shorting on those very same pals of his... yeah, like HE's gonna look out for the American investing public.

2008 Aug 21 03:14 PM

[lonie:]

A true story .
I have a friend ,Vehar , that had an old fellow neighbor friend ,about 55 , that had about 10,000 saved and stored in his closet . The guy was a farm laborer and brick mason . Vehar explained to him that in 10 -15 years the money wouldn't be worth much so he explained to him that he could get some 0 cupon bonds that paid about 13.5% at time ,1980 , and in 14 years they would be worth about 70,000 dollars. He takes him and the cash to his broker at Pain Webber . They do the transaction . The old fellow pulls out a pistol and lays on desk ; senior ,see this ,you losa my money i come back with it loaded.

I suppose it was effective . Later i heard he got his gains.

2008 Aug 22 04:54 AM

[Steven Hansen:]

it is a shame when an armed robber of a liquor store who takes $200 gets 20 years in jail, and Financial Market robbers to lie to get millions get a house in Malibu.

2008 Aug 22 05:53 AM

[WalterN:]

I think that people are mad enough that they would like to see some "blood". Of course the people who deceived us and failed to exercise their oversight should be prosecuted. Barney Frank should be one of the first ones charged. Other senior members of the house and senate who were responsible to see that things were done right should lose their committee appointments and possibly prosecuted.
The SEC top management people should be prosecuted.

"Everybody else is doing it" is no excuse for participating in poor business practices.

2008 Oct 11 05:06 PM