Stop, Thieves!

The Democrats just don’t get it. They are using the Enron scandal in the same stupid, narrow, and vain way that the Republicans used Whitewater to try to tarnish the former First Lady. And where did that get them? She’s now the junior senator from New York, arguably more powerful than ever.

The reason Enron went from 60 to zero in 30 seconds has nothing to do with the legislation to deregulate electricity that Phil Gramm might have jammed down the throats of Congress to help his friend, Kenneth Lay, CEO of Enron. And it has nothing to do with any favors that Lay may have given to the GOP.

Think about it. When Enron was in a position to be saved – the way that Long-Term Capital was saved by a Democratic regime because its failure would have hurt too many brokerages, including Goldman Sachs, where Bob Rubin, the then-secretary of Treasury, once toiled – the GOP did nothing. George W. Bush did nothing. If the president is such a friend of Ken Lay’s, he sure has a funny way of showing it. And he could have done something. No one – I repeat, no one – would have been surprised if Bush had said that it wasn’t in the national interest to let Enron fail, given its key role in the nation’s electric supply, something that must be maintained for national-security purposes.

But the whole Democratic scenario that it was the Republicans who abetted the chicanery at Enron – and believe me, there was a ton of chicanery – is absurd. In fact, I’ll bet that Phil Gramm’s wife, Wendy, who was on the audit committee of Enron, didn’t even know about the shenanigans that the company’s chief financial officer was up to.

And that, not Republican rules changes, is the crux of what the Democrats should really be complaining about. I think most of the people who oversaw Enron didn’t know what was going on. And why should they have? Nobody ever suffered from turning a blind eye to what looks like fraud. There’s no incentive. In fact, judging by the big fees that accountants get to consult with companies, I could argue that the relationships have become totally incestuous, incubators of free-wheeling tricks to make stocks go higher regardless of the ethics trashed or the rules broken.

The Republicans and the Democrats have created a climate in this country where nobody gives a damn about enforcement. Nobody fears what will happen to them if they commit accounting fraud. We don’t care what happens to the little shareholders if we mess with the numbers. Legislation designed to protect the little guy, the Securities and Exchange Act, has been neutered. Under Clinton, this kind of white-collar fraud was overlooked in favor of rules like Regulation Full Disclosure, which clamped down on the free dissemination of information to selected accounts. That was the mantra of the Clinton SEC. Slam the door on private dissemination to level the playing field, but then blow the whole stadium up with light enforcement of stock-boosting frauds!

So now everybody just figures he can get away with anything in the name of getting a higher stock price. In the end, the Enron Affair wasn’t a breakdown of deregulation; it was about the complete absence of fear of prosecution. It was the disappearance of enforcement against white-collar wrongdoing in the boardroom. Enron’s fall is the logical extension of a decade of total laxity, when anything went as long as the stock went higher and the insiders could bail at great prices.

And why shouldn’t Enron executives feel safe? Nobody’s spent any time in jail for Cendant or Sunbeam or Waste Management, the three biggest fraud cases of the past decade. All three companies’ executives promoted schemes to raise the stock price essentially so they could sell shares while the rest of us got stuck holding the bag. To me it is just garden-variety theft in the name of a higher stock price – where the chief financial officer gets a huge cut of the profits while the little guy loses everything – and it seems to pay off every time.It wasn’t always thus. In the eighties, we had a rash of insider trading that climaxed with the massive prosecutions of Ivan Boesky and Mike Milken. (Save the e-mails: I know that Milken didn’t go down for insider trading, but it sure was on everybody’s mind after the government went after him for it.) The government made insider trading a priority. As someone in the business during that era, I knew – as did many of my colleagues – that if we traded on insider information, we were going down. We calculated that there was a good chance we were going to jail if we got caught.

But accounting fraud? Nobody’s too worried about it because nobody goes down for it. Particularly the accountants! I can’t find an instance where a major accounting firm’s partners lost personal property or spent time in jail for abetting or simply looking the other way when there was fraud. Enron should change all that. Enron is to accounting chicanery what Boesky was to insider trading. The government could send a message once and for all that if you hide transactions, if you dissemble to directors, if you cheat on your books to move up your stock price, as I think we will find happened with Enron, you are going to jail. More important, since Enron is now bankrupt, your accountants, who checked off on the deceit, will get prosecuted as well and get held for the damages. They still have money! Too often what happens instead is that the liability just gets fobbed off on the insurers and the only real cost might be a higher premium.

The focus in Washington needn’t be on endless hearings about shattered 401(k)’s and government oversight and the risks and virtues of deregulation. The focus should be on getting scalps and making those scalps pay. The goal should be that everyone else is too scared to launch another scheme to boost stock prices through bogus accounting and hidden, off-balance-sheet investments.

But if the government just plods along the way it has done in all the other accounting cases, and the Democrats spend all of their time wondering whether Ken Lay tried to get Republicans to help him in a nonexistent scheme to hurt consumers with deregulation, you can bet that Enron will be the blueprint for all executives wishing to make a killing in the market … and get away with it.
This week’s “Mutual Fund Monday” feature takes a look at all-weather growth funds. Available free of charge at

James J. Cramer is co-founder of He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time.


Stop, Thieves!