JURIST Contributing Editor Nancy Rapoport of the University of Houston Law Center says that the recent spate of guilty verdicts and stiff sentences handed out for corporate fraud committed by the erstwhile leaders of Enron, WorldCom, Tyco, Adelphia and other companies suggests that executives need to take personal responsibility for the propriety of their deals, and shouldn't "outsource" their ethical judgment to others…

Guilty, guilty, guilty. Enron’s Ken Lay and Jeff Skilling were both found guilty of conspiracy, securities fraud, and various false statements earlier this year. Since Enron’s fraud was uncovered, various high-profile employees of companies from WorldCom to Dynegy to Tyco (and so on) have likewise received guilty verdicts and are either serving time or awaiting sentencing.

In the last few days, three significant sentences have made the news. Dynegy’s Jamie Olis was re-sentenced to six years (down from the original 24) for his role in inflating Dynegy’s cash flows. Bernie Ebbers pulled into prison yesterday in his Mercedes to begin serving his 25-year sentence. And also yesterday Andy Fastow received six years (down from the agreed-upon 10-year term that was part of his plea-bargain) for his role in the chutzpah-laden Enron frauds.

Not too long ago, Tyco International’s Dennis Kozlowski received an Ebbers-like 25 year sentence, and John Rigas of Adelphia Communications received a 15-year sentence. On the other side of the government’s win-loss record are Richard Scrushy and the dearly(?) departed Arthur Andersen accounting firm.

Different stories, different types of frauds, different sentences. What can we learn from the sentencing thus far?

Lesson one: timing is everything. Olis had originally received a mind-boggling 24 years in prison for participating in Project Alpha, a scheme that had overstated Dynegy’s cash flows. Then the U.S. Supreme Court, in U.S. v. Booker, ruled that the sentencing guidelines were just that — guidelines — rather than mandatory rules. As a consequence of the Supreme Court’s ruling, the Fifth Circuit reversed Olis’s sentence, and on resentencing, the district court gave Olis a sentence of 6 years. Mind you, Olis is not serving “easy time,” if such a thing even exists. Before his resentencing, Olis was moved from a minimum-security prison to a medium-security one. I’m sure that the fact that Fastow—who masterminded much of Enron’s dirty deals—received the same sentence that Olis did. And Olis wasn’t the mastermind of Dynegy’s Project Alpha.

Lesson two: remorse matters. David Delainey of Enron was sentenced last week to 2½ years in prison for his insider trading. That sentence reflected his cooperation with the prosecution and, perhaps, a genuine remorse for his role in Enron’s schemes. Andy Fastow cooperated with the Enron prosecution team, and he is cooperating with the plaintiffs in the shareholder suits. Fastow apparently demonstrated, to the district court’s satisfaction, that he was truly a changed man by the time his sentencing date came around. (One of the tragedies of Ken Lay’s death was that he was never able to live long enough to answer the question of whether he, too, would have reformed himself over time.)

Lesson three: symbols speak volumes. Many months before Ebbers drove himself to prison in his luxury car, Martha Stewart carried a Hermés bag into her jury trial. Although Stewart went to prison for a relatively minor transaction, she might have avoided some jail time by remembering that few jurors own a handmade handbag that takes years to acquire (from a multi-year waiting list).

Lesson four: outsource your conscience to other professionals at your own risk. Skilling has every right to be nervous about his own upcoming sentencing on October 23. Although Lay and Skilling both pointed fingers all over the place in their defense, the judge and the jury found that both of them knew darn well what they were doing when they approved the Enron frauds. And that’s one of the most important lessons to come out of all of these corporate fraud cases: no matter how many people say that something’s ok, you still have to think for yourself.

Olis’s testimony at the resentencing illustrates the theme of the sentences:

Olis said as he worked on the 2001 transaction at the heart of his fraud conviction, Project Alpha, he believed his bosses at Dynegy determined it was proper and legal. “I trusted their judgment,” Olis said. “Now I look back and I should have questioned everything, but I didn’t. And here I am.” [Tom Fowler, Ex-accountant says he regrets some ‘got hurt’: Olis insists he’s ‘not a bad person’ despite conviction, Houston Chronicle, Sept. 14, 2006]

Irony of ironies, Enron’s advertising campaign, pre-scandal, was “ask why?” But few people did.

There has to be a middle ground between asking “why” about every possible order from above and not asking “why” when something is clearly fishy. But where should we draw the line? The jurors in Enron drew the line very close to, if not on top of, the “clearly fishy” part of the continuum. I didn’t review any of the evidence in the Olis case, so I don’t know where on that continuum Olis’s case falls, but my guess is that the intentional manipulation of cash flows to present a healthier financial picture is closer to the “fishy” line than to the “clearly ok” line.

The lesson from these sentences in the various corporate scandals is not, therefore, to ask why on every deal, even the most clearly legitimate one. The lesson is to ask why something feels fishy when those first tiny quivers of “uh-oh” start vibrating in the pits of our stomachs. No matter how many people assured Lay and Skilling (and Olis and Fastow and Ebbers and Koslowski) that the deals were on the “light grey” side of a black-and-white ethical line, they should have thought for themselves as well. These executives allowed others to bless the fishy (or outright illegal) deals. And that’s why they’re serving time. Maybe their consciences bothered them in proposing the deals; maybe not. Had they asked themselves why — why they needed to hide losses, why they needed to manage cash flows—they might have looked more closely at why their businesses were failing. Asking why is important.

Lesson five: you may never know when to ask why. Knowing when to ask why is easier said than done. Stanley Milgram’s famous experiment, in which the experimental subject shocked to the death a complete stranger because the “scientist” took all responsibility, shows that humans are very, very good about fooling themselves. Milgram’s theories about cognitive dissonance — the inability of anyone to maintain competing moral views about himself—form part of the explanation of what went wrong with all of these corporations. So are Solomon Asch’s social-pressure experiments, in which the subject was willing to agree that an identical line was, in fact, not identical, as long as everyone else in the room said that the line was not identical as well. Social pressure, cognitive dissonance, the diffusion of responsibility (“someone else will fix the problem”) — all of these theories help to explain how such large-scale, clearly fishy cor
porate frauds occurred. All of us are, at some level, superb at creating rationalizations for our clearly immoral behavior. I’m not immune. Neither is anyone else. The smartest people in the room are often so smart that they can fool themselves with clever rationalizations. And they can fool others, at least for a time. But outsourcing one’s conscience is, in the end, a very foolish thing to do.

Nancy Rapoport is professor of law at the University of Houston Law Center
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