Wednesday, January 5, 2005

The "Honest-but-Ignorant" CEO Defense

A front-page article in the Wall Street Journal (Jan. 5) gives a nice overview of the government's prosecution of Ken Lay, the twice-former CEO of Enron.  According to the article, and any number of statements by Lay, his defense at trial will be that he was ignorant of the wrongdoing occurring at Enron, and that any misstatements he made were the result of being deceived by subordinates and not done intentionally.  As the article notes:

Yet despite Mr. Lay's alleged misstatements, and the plentiful evidence that fraud pervaded Enron, it may not be easy for prosecutors to convict him. Some of the statements prosecutors have focused on are suspect on their face, such as when Mr. Lay in October 2001 apparently misstated the reason for a billion-dollar hit to Enron's balance sheet. But others -- such as giving a rosy assessment in the month before a quarterly earnings report and calling Enron stock a bargain -- are much like the utterances routinely made by hundreds of corporate executives.

Lay has a website ( that advances his position as an honest, upstanding member of the community, and it includes an attack on the government for its investigation of his wife, Linda, related to sales of Enron's stock by a family charitable foundation for which she is the president.  The "honest-but-ignorant" defense is similar to what Richard Scrushy has advanced to defend against fraud charges involving HealthSouth when he was CEO.  Scrushy asserts he was mislead by, among others, all five CFOs that the company has had since it was formed (see Jan. 4 post "Will Scrushy Testify?"). 

The "pure heart/empty head" defense (or, "I'm an idiot") does not deny the misconduct, but instead seeks to avoid liability by showing that the government's proof of intent is not sufficient to convict.  The defense (or one of its many variants) is quite common in white collar crime cases.  Whether it is successful or not is another question.  A. Alfred Taubman offered the defense against price-fixing charges when he was Chairman of Sothebys, and after conviction served approximately 10 months in a federal correctional institution.  In another case, United States v. Gellene, 182 F.3d 578 (7th Cir. 1999), the defendant (an experienced bankruptcy lawyer) testified that his apparently false statements during a bankruptcy proceeding were not made with the requisite intent and "[h]e called these conclusions 'bad judgment' and 'stupid, but not criminal.'" It is often difficult for successful professionals to argue that they got to such high positions based on ignorance, but certainly not impossible even though it requires confessing to one's own failings. (ph)

Fraud, Prosecutions | Permalink

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This is not a new defense but now we have many execs facing public trials and we get to see it play out in the newspapers. The creation of a hierarchy automatically leads to a complex distribution of responsibilities in organizations. [Read More]

Tracked on Jan 13, 2005 3:37:04 AM