Category Archives: Law

Glad that I am pretty much done with dissing Enron — out of respect for the late Mr. Lay.

Monday, I suggested that it is troubling that the average investor could not understand Enron’s accounting. Later, I will talk at whether it is possible to have accountings for new economy businesses that the average individual investor can understand. (Enron pretended that it was all new economy. It really was just another energy trader.) But, a little background seems helpful.

After the amazing business scandals, even by Enron standards, of the late 1920s and early 1930s, Congress had to do something about the public securities markets. Public faith was nigh zero. The question on the table was what to do. One answer would have been to have a government agency that really regulated public capital. For example, a government agency could look over the shoulder of corporate managements and second-guess the stock and bond markets. Congress instead decided to put their faith in, among others, the accounting industry. Really! Laff, laff! More below the fold….

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With all of the media attention given this week to Joe Lieberman’s waivering loyalty to the Democratic Party, I decided to go on a slight tangent and discuss how, more than anybody else in America, Joe Lieberman is responsible for some of the worst corporate abuses during the recent tech bubble and for the current growing options backdating scandal. The Connecticut media has noted this, but not the national media, and it is real important. In short, in 1993, Lieberman saved amazingly bad accounting for when a company pays an executive with stock options instead of cash. This caused options to flourish. Options make an executive more concerned with short-term fluctuations in her company’s stock price than in running the company well. Disaster resulted. Details below the fold. Back on track tomorrow.

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Thanks to Michael for giving me the chance to guest blog. It was fun 2 years ago. Hope you out there find my stuff somewhat interesting.

I am a tax guy. Unfortunately, from my blogging point of view, in the US, the only interesting discussion going on about taxes these days is about the estate and gift tax, and I have little to add to that debate. (Yes, we should not be Mexico…)

But, in the other area in which I know something, law and accounting, lots is happening. The ongoing option backdating scandals make it clear that much still is wrong with the accountability of corporate managements. So, for now, accounting seems more worth writing about.

Which gets me to Enron. Many have noted the importance of the recent convictions of Lay and Skilling: The convictions restored some faith in justice. More importantly, for my purposes, they saved public capitalism. If Lay and Skilling had been able to get away with what they did, it would have seriously undermined the public’s faith in the capital markets.

But another aspect of the convictions has not received public scrutiny and merits discussion: how the convictions were achieved.

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