Randomly Noted

An intriguing “op-ed” piece in today’s Wall Street Journal sheds light on an important recent action taken by the Securities and Exchange Commission in the ongoing and multifarious debate about the rights and wrongs of public company executive compensation.

The piece is well worth reading (Click here to see it). In it Russell G. Ryan, a securities lawyer and former assistant director of the SEC’s division of enforcement, takes issue with a July 22 lawsuit  the watchdog agency filed against the former chief executive of CSK Auto Corp., demanding he return about $4 million in bonuses and stock sales profits. The $4 million was granted during a period the SEC says CSK was “committing accounting fraud,” even though the SEC explicitly does not allege the CEO himself engaged in fraud.

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The U.S. business media and even the general news mediums will be busy today with all Madoff all the time.  

A couple of comments to add to the fray:

-Besides the symbolism of the 150-year sentence for fraudster Bernard Madoff, U.S. District Judge Denny Chin called the crimes “extraordinarily evil.” The sentence length and the language are usually reserved for violent crimes committed against other human beings. This shows that white collar crime, if pervasive and long-standing as Madoff’s crimes were, are starting to equate with violent crimes in the view of the courts. Many were shocked a few years back when Worldcom Inc. Chief Executive Bernard Ebbers got 25 years in jail for his white-collar crimes. This continues the trend. Whether it will prove a deterrent to further white collar crimes, or whether, as some argue, there are some people who are just simply going to violate the rules whatever the rules may be, we”ll let the pyschologists and criminologists ponder. 

-For all the recent criticism of the actions or inaction of the Securities and Exchange Commission in recent years, the Madoff case stands out as the watchdog agency’s most egregious failure.  SEC staff were being provided with information from Madoff rivals. Nothing happened. The nature of the crime should have played to the SEC’s historical enforcement strengths: a Ponzi scheme involving traditional securities.

Of course, the Madoff story isn’t over.

The Wall Street Journal reports Citigroup Inc. has told perhaps five former executives it won’t pay them the rest of huge severance packages that were agreed to be disbursed over time.

Apparently, there are tens of millions of dollars involved that were scheduled to be paid out.

This is the article’s (written by David Enrich) crucial paragraph in terms of corporate governance and the rule of law. “Under the terms of the exit agreements with the departed executives, Citigroup is contractually obliged to make the payments. But bank officials essentially are wagering that the former executives will conclude that it would be publicly embarassing for them to file lawsuits against the struggling, taxpayer-backed company seeking the money.”

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It was figuratively the last thing the U.S. Securities and Exchange Commission needed.

Certainly the watchdog agency would like to shake the adjective beleaguered from prefacing seemingly every reference to it. But news that two enforcement attorneys are being investigated by federal prosecutors for possibly violating insider trading laws will do nothing to help that effort.

It is one thing for the SEC to be accused, as it has been, of essentially dropping the ball in overseeing U.S. securities firms at a time when many had poor risk controls and too much leverage. But to have the integrity of even a couple of enforcement attorneys questioned goes to the heart of the agency’s ability to function and garner respect in markets.

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The huge if necessary U.S. government intervention into the economy is raising some fundamental questions about the nature of our capitalism.

Among them are does patriotism trump capitalism? Does morality? Whose definition of patriotism and morality do you use? Are globalization and national interest compatible?

Things were simpler when business and finance were robust and government help wasn’t needed. Then it was cleaner and easier to argue that market rules: straightforward if sometimes brutal, were the best overall path toward the greater economic good. Yes, there were casualties, but globalization trumped patriotism and self-interest topped empathy. It’s not that simple anymore.

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As each corporate chieftain falls – Bank of America’s Ken Lewis, GM’s Rick Wagoner, Merrill Lynch’s John Thain, and others around the world – I wonder about Schadenfreude, the German term for the feeling of gratification or pleasure one derives from another’s misfortune. Ditto when one reads about the misfortunes of the wealthy – now rather less well-off – bilked by Madoff or otherwise returning to earth with a thud. A recent NYT story about upscale New Yorkers scrambling to find decent public schools for their kids now that they can no longer afford posh private schools – boo-hoo! – likewise spurred a family discussion of Schadenfreude and morality.  Continue reading…