Looking for the next Enron

Filed in archive corporate crime on May 29, 2006

In the new york times over the weekend, Gretchen Morgenson came out with the rhetorical question Are Enrons Bustin' Out All Over.

Basically, the main thrust of her argument is that shady corporate practices continue - particularly in light of the revelations surrounding Fannie Mae - and that a lot of work needs to be done to ensure that there isn't another Enron:

"Yes, the long and sorry story of Enron is nearing a close. Unfortunately, questionable corporate practices continue apace. There is obviously much work to be done -- by prosecutors and shareholders -- before we can be sure that other Enrons will not happen.
"Prosecutors know what trails to follow. Shareholders, less accustomed to taking such an active role, may not be as certain.
"They should begin by holding directors accountable for trouble that occurs on their watch. They should demand that executives forfeit compensation generated by fraudulent practices. And they must hold their mutual fund managers responsible for proxy voting practices that encourage excessive pay and cozy, somnambulant boards. If these managers don't vote against directors who hand out oversized pay for undersized performance, they are part of the problem and should be fired.
" As the Enron jury eloquently told us last week, silence in the face of these offenses gives consent.''

The article itself doesn't tell us much that's new, not quite up to Morgenson's usual standards, but it's a good start for looking at where the next trouble spots might be.

Helen Huntley, personal finance editor of the St Petersburg Times nominates the relatively under-regulated hedge funds as the source of the next big scandal. It's a point also taken up in the Seattle Times.

That's the context for the calls for more transparency and greater controls of hedge funds, as reported in The Independent. And certainly the managers in the hedge funds are cleaning up financially, according to Institutional Investor magazine

For his part, former Securities and Exchange Commission chairman Harvey Pitt nominates the backdating of options as the next big scandal in his piece for Forbes.

The backdating of options is also critical when it comes to insider trading. Prosecuting insider trading is hard enough. But as University of California law professor Stephen Bainbridge told Forbes, the use of stock options makes it even more difficult: "So much executive compensation is in the form of stock and stock options that insiders are always trading in their own stocks. The executive can almost always say they possessed knowledge but didn't trade on the basis of it."

So where's the next scandal going to come from? The Enron does not spell the end of malfeasance. As Jill Frisch, a securities professor at Fordham University School of Law told Matthew Goldstein in TheStreet.Com:

"I don't know if there has been a big change in behavior. What we are talking about here are people who've spent their lives taking risks. They are worth millions. Yes, they can go to jail. But they are used to living in the fast lane.''