This Man Went to Prison for Eight Years. Why Don’t Other CEOs?

Photographer: Michael Nagle/Bloomberg News

L. Dennis Kozlowski outside Manhattan Criminal Court in 2005.

L. Dennis Kozlowski, former CEO of Tyco International Ltd., is is out of prison after serving an 8 1/3-year sentence. It’s notable for observers of American corporate corruption because Kozlowski’s conviction in 2005 marked a moment in which American prosecutors seemed to have turned serious about white-collar crime.

That same year Bernie Ebbers, who was behind the massive WorldCom Inc. telecom fraud, was sentenced to 25 years in prison, where he remains. The Enron Corp. trial took place in 2006, and former CEO Jeff Skilling was also sentenced to a long term.

Fast-forward to 2013, and it looks like any thought that corporate malfeasance could be dealt with as seriously as, say, mugging someone on the street for 20 dollars was premature. TMN has always been wary of the “throw  ’em all in jail” sentiment after the 2008 crash. Losing money, even other people’s money, even in huge amounts and in stupid ways, is not a crime.

Still, even if fraud wasn’t behind all the losses of the mortgage boom, billions of dollars of loans made in the mortgage boom were riddled with fraud at every level. At least some folks at banks and mortgage companies knew that and we have not seen anything like the prison terms meted out in the Tyco, WorldCom and Enron cases.

Why not? It’s not because we’ve become softer on white-collar crime. It’s because a lot of what happened in the mortgage boom, with its cynicism and widespread dishonesty was less like the misdeeds at Enron and Tyco and more like those of the dotcom boom and bust of the 1990s — which also yielded very few prosecutions.

In both cases, people who pretended to know what they were talking about claimed that the run-up — first in tech, then in housing — was evidence of a new market paradigm. Dressed up with theories about the inevitable advance of technology or the scarcity of desirable real estate or the permanence of low interest rates, these new paradigms came down to “This can only go up.”

The Internet executives who sold their shares and the (relatively few) housing investors who were smart enough to get out in time offloaded their holdings to a proliferation of willing suckers. That, just like losing vast sums of money is generally not illegal, though often it certainly counts as sleazy.

In both the tech and real estate bubbles, there was a second category of people who got rich: people with insider knowledge of the process who knew exactly how financial statements were massaged or mortgage documents falsified to keep the carousel spinning when it was clear that legitimate revenue was dwindling. Sending people to jail demands that prosecutors  prove that (A) something illegal was done, (B) senior executives knew about it and (C) profits were made from that.

(A) is hard because often the accounting involved is opaque, the records voluminous and juries often willing to give white-collar defendants the benefit of the doubt. (B) is hard because in case after case senior executives of companies that fell apart have turned out to be startlingly ill-informed about just what was going on at their companies. (C) is hard because senior executives almost invariably have rule 10b5-1 stock sales plans that let them regularly schedule millions of dollars worth of share sales while making it almost impossible for prosecutors to tie them to specific acts.

There’s one more thing that makes post-crash prosecutions especially hard: The folks who actually did stuff that was illegal often can’t be distinguished from those smart, lucky, or cynical enough to bet on the new paradigm and get out when the getting was still good. It might seem intuitive that the more fraud there was the easier it would be to find people to prosecute. The reality has been the opposite. In both tech and mortgages the great herd of people willing to bet that the booms represented a brilliant new economic reality has provided plenty of cover for those who took advantage of them.

An earlier version of this post appeared in the Market Now daily email. Click here to register and subscribe. Or here to follow @markgimein on Twitter.

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