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The official website of Drs. Michael and Mary Dan Eades, low carb pioneers and authors of Protein Power.

Justice American style

Howard D. Raines, J. Timothy Howard and Leanne Spencer, respectively the former CEO, CFO and controller of Fannie Mae, are in hot water. From all appearances these two and a handful of others–at least according to regulators–pretty much looted the quasi governmental lending institution by fraudulently manipulating earnings to increase their bonuses.

Echoing many findings that the agency’s [Office of Federal Housing and Enterprise Oversight] 27-month investigation into Fannie Mae uncovered in May, the lawsuit contended that the three executives took part in widespread misconduct and mismanagement from 1998 to 2004. It accused them of filing misleading financial reports, improperly applying accounting principles while knowingly failing to establish sound internal controls and misleading regulators. All the while, the three were said to have been manipulating Fannie Mae earnings to maximize their bonuses.

How much in bonuses? Well, Mr. Raines alone collected $91.1 million, a hefty amount by anyone’s estimation. The government is trying to get Mr. Raines to give back $84.6 million, Mr. Howard, $27.3 million, and Ms. Spencer a mere $5.6 million. In an effort to collect, the government is filing civil suits against these former officers. If the government prevails in these lawsuits, the former executives will have judgments against them that the government can attempt to collect. My bet is that the most likely outcome will be that the whole affair will be settled quietly. The execs will pay back some fraction of their obscene bonuses and the government will declare victory.

So, we have an institution whose financial officers cooked the books in an effort to show more earnings so that their bonuses would be larger. If true, they basically pillaged the company for their own gain. The execs were fired, and, at worst, may have to pay back most of the money they took. I say most because the government isn’t going after the entire amount of their bonuses, just a large fraction.

To summarize, an organization under government supervision allows its execs ran amok with their hands in the cookie jar. And the government comes with hat in hand asking for part of the money back. No jail time. No ruination. No making an example. No law changes.

Why? Could it be because the government itself was supposed to be the watchdog against these types of abuses?

Compare and contrast the Fannie Mae situation with that of Enron, which demonstrated the way the government works when it isn’t at fault.

By his own admission, Chief Financial Officer Andrew Fastow cooked the books. He was, in the words of our Commander-in-Chief, the head evil doer. So, what happens? Does the government go after Andrew Fastow, since, after all, he was the villain? No, because no one really knows who Andrew Fastow is. The government doesn’t make headlines by nailing the real crook. The government gets headlines by going after the public face of the company–in the case of Enron, Ken Lay and Jeffery Skilling. (Disclosure: I don’t know anyone at Enron. I don’t even know anyone who knows anyone.)

So what happens? This is what I consider justice American style. The government takes the real culprit, Fastow, and says to him: help us get Lay and Skilling and we’ll let you off the hook. Instead of spending the years in prison that you deserve, we’ll see that you get off easy–as long as we hang the guys with the big names. And, in so doing, make our own names.

The New York Times did a major piece on the huge effort it took the government, even with Fastow’s help (and the help of a dozen other underlings facing their own prison time), to build any kind of case against Lay and Skilling.

SHORTLY after Enron collapsed in December 2001, the Justice Department assembled a special federal task force to delve into the complexities of the company. One fact emerged quickly, task force members said: there was no obvious case to be made against Mr. Lay. Investigators focused on the use of murky partnerships, particularly a vehicle known as LJM, to manipulate Enron’s financial performance. But that inquiry unearthed little evidence of crimes involving Mr. Lay.

”There was this public perception of Ken Lay as the mastermind, but that really didn’t bear out,” said Leslie R. Caldwell, who headed the task force in its first two years. ”We realized very fully early on that Lay was not involved in the decision-making day to day and that we weren’t going to be able to prove his involvement in the structuring of transactions like LJM.”

The trial took place, and everyone knows the outcome. Lay and Skilling were convicted. Lay died of a heart attack and Skilling is due to enter prison shortly for the start of his 24 year sentence. The trial itself was, in my opinion, kind of a farce. It was a typical triumph of American jurisprudence. The prosecutors, instead of laying out the supposed crimes, entangled Lay and Skilling in a bunch of testimony that had nothing to do with the crimes, but made the look shifty. It was all conducted much in the way the Scott Peterson trial was conducted. Recall the countless hours spent in the Scott Peterson trial listening to the tapes of his conversations with his extra-marital lover Amber Frey. He indeed had an affair, he indeed was a creep, he may have indeed murdered his wife, but, and this is my opinion, he was convicted of being a swine. I thought all that testimony was extremely prejudicial, but the judge allowed it. Same thing with Lay and Skilling. The technique is to show that they gave a contract to Skilling’s at the time girlfriend for a million bucks, which was outside the ethics code of the company, and by doing so, persuade the jurors that they’re both crooks that probably destroyed the company.

What about Andrew Fastow? He was expected to get 10 years, but, thanks to his cooperation in bringing down Lay and Skilling, who were one umpteenth as guilty as he, he got a mere six years. And because of the length of his sentence, Fastow gets to spend it in a minimum security prison. Skilling, on the other hand, was sentence to just a couple of months longer than the maximum allowable to let the guilty party spend his time in a minimum security facility. So, Skilling, who thought he was being prosecuted unfairly and tries to fight it, spends the next 24 years under heavy lock and key, while the real swine spends six years in a country club prison.

And what about Sean Berkowitz, the government prosecutor in the case? Well, based on how well he did using the bottomless pit of money the government provided him to prosecute the case, he was brought in as a partner in a major law firm, Latham & Watkins. His salary jumped from $100, 000 per year as a U.S. Attorney to $1.4 million. I’m sure he thinks the American system of justice is grand.

When the government oversees the shenanigans, as with Fannie Mae, it is swept under the rug with a civil lawsuit. When the government prosecutes business, it goes for headlines and prison sentences. In my opinion, it’s neither right nor fair.

1 Comment

  1. L. Paul Teague on December 20, 2006 at 12:47 pm

    I agree with you that the handling of the Fannie Mae shenanigans as a civil law matter is not right. What Howard Raines et al did should be prosecuted as a criminal matter. Howard Raines became the Fannie Mae CEO because he was a long-time Bill & Hillary Clinton confidant.

    However, I must disagree with you about Lay and Skilling. As an oil and gas industry executive who had extensive business dealings with Enron, I am confident that Lay and Skilling knew exactly what Andy Fastow was doing and why. Lay and Skilling were not stupid enough to leave an obvious record of their involvement with Fastow. The government attorneys knew this.

    The government also knew that Fastow was doing what Lay and Skilling wanted done and that Fastow was doing their bidding. The only way the government could prove it was through Fastow.

    Lay and Skilling were not the hands-off detached managers their lawyers tried to portray in the trial. They were properly convicted.

    Raines et al are getting a free pass. I wonder why. It is not right nor fair.

    Thanks for the insight on this case.  Since I don’t have any inside knowledge, I will defer to yours.

    Best–

    MRE

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