The blockbuster article in New York magazine made it clear that Dick Fuld was telling investors and creditors one thing about the health of Lehman Brothers while the company’s internal books were telling executives another. So will Fuld find himself on the business end of a federal indictment? Should he?
If the past, especially the collapse of Enron, is prelude, Fuld should probably be preparing to defend himself against criminal charges. Federal prosecutors tend to suspect that dramatic business failures result mostly from criminal actions rather than poor business decisions. They have a powerful arsenal of federal law and know almost no bounds to the creative use to which they can be put. All the incentives will agitate toward prosecutiion. Putting Fuld, who is one of the least appealing executives in recent history, into jail would be a career making move for a federal prosecutor.
But that doesn’t answer the question of whether or not Fuld should be locked away. Let’s put aside questions of technical legality, which don’t really matter as much as people suppose anyway, and ask instead whether or not the criminal justice system is a good way of reaching a just result in these cases or preventing corporate criminality in the future.
It seems pretty obvious that the odds of acheiving some sort of metaphysical justice by prosecuting Fuld are unlikely. Fuld almost certainly did not believe he was committing a crime–even when he was ignoring what his books were telling Bart McDade. Right up until the end he was “drinking the Kool-Aid.” Which is to say, he believed that the market was mispricing Lehman’s equity, assets and risks. If you ask him now he’d probably tell you the same story: given a bit more time and a healthier credit market, Lehman would have been just fine. Locking up Fuld here smacks of post-hoc prosecution based on actions he probably never suspected were illegal, and which he would never be prosecuted for if his firm didn’t fail.
That’s a deep problem with criminalizing these cases. Basically, we’re criminalizing business failure. Criminals whose companies suceed get a pass. This is why law professor Larry Ribstein describes this as the “corporate crime lottery.” We’re just punishing the criminals unlucky enough to get caught holding a failed company.
Larry Ribstein explains why its probably a bad idea to turn these into criminal cases.
“Given the multitude of pathologies that exist within a corporation, the pervasiveness of agency costs (which inherently cannot be reduced to zero), and the variety of market and legal mechanisms that address these problems, there is a severe line-drawing problem regarding what ought to be clearly wrong enough to be regarded as criminal. If the law doesn’t adequately draw those lines, we risk diluting the force of criminal liability. Moreover, there’s a severe risk of over-deterrence, since honest executives will give a very wide berth to conduct that has any chance of involving jail time – with the result that they may avoid legitimate as well as illegitimate activities.”
What’s more, there is probably zero deterrent effect to prosecuting Fuld. Dedicated fraudsters will not turn straight because they see Fuld get prosecuted because they’ll sense he’s being punished for the collapse of Lehman. As long as they are confident their own business won’t fail, there’s little reason to turn away from fraud.
In short, absent some evidence of genuine criminal intent on Fuld’s part, we should probably hope against a criminal prosecution in this case.