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Saturday, September 12, 2009

The Desecration of David Stockman: Confusing Business Failure with Criminality

It is the approximate one year anniversary of a calamitious week in American financial history, when the credit markets came very close to seizing up, the federal government took control of Fannie Mae and Freddie Mac, and Lehman Brothers declared bankruptcy.  Several formerly too-big-to-fail institutions did just that in 2008 (or were reduced to a shadow of their former selves), and there are multiple civil and criminal investigations of these companies and their executives.  

It is time to remember how the reputation and life of a business leader and former high-profile presidential advisor was almost destroyed in the wake of a less-prominent business failure.

A few years ago, automotive parts manufacturer Collins & Aikman went into bankruptcy after trying to stave off its financial difficulties.   In the wake of this financial failure, a few of its top executives were criminally indicted on securities fraud charges of deceiving the company's shareholders and creditors.  

Among those charged was chief executive officer David Stockman.   If the name sounds familiar, think back to the Reagan Administration's first term.  Stockman was the Administration's budget director at a time when the Administration pushed through an ambitious series of tax cuts which were largely credited with sparking the country's economic renaissance in the 1980s.

Stockman claimed, essentially, that he was being prosecuted for business failure.   Ultimately, earlier this year, the federal government elected to withdraw its criminal charges in the "interests of justice."  (This brings to mind former Reagan Administration Labor Secretary Raymond Donovan's famous quote, "Which office do I go to, to get my reputation back?")

Here's to hoping the Justice Department is appropriately careful in assessing these companies' situations.   A business failure is not a crime.  A business failure may not even mean that its executives did anything wrong, whether we're talking about actual criminality, recklessness or negligence.   There may not even be "bad business judgment."   In fact, there may be cases where businesses fail in spite of their executives' actions...meaning those executives were a net plus to the situation.   Sometimes, businesses fail because the world is changing, markets respond differently, and the competitive forces in our economy mean that often there's a loser every time there's a winner.  

From my observation post, there have been a good number of criminal securities fraud cases involving executives who felt pressured to "meet the numbers" set by Wall Street analysts in order to avoid drops in their company's stock price.   When blame is pointed at executives the minute the stock price drops, unfortunately those executives inclined to skirt, flaunt or outright disregard the rules have a greater incentive to "pull out the stops" to avoid the event that would precipitate the price drop. 

(Full credit should go, however, to all those fortright and upstanding executives who are courageous enough to do the right thing and show the leadership that makes them qualified to run their companies.   These people often don't make it on CNBC, they don't have their names on buildings, they often serve with no fanfare, but they should be recognized.)

A few years ago, a number-two executive at a certain information technology company got on a plane to get a backdated contract signed in order to fudge meet the analysts' revenue numbers.   This same executive was part of a scheme to modify our Gregorian calendar to add a few days to a month...hence giving rise to a thirty-five day month.   (Just think about that for a second.)   Of course, said executive is now getting three hots and a cot, courtesy of your tax dollars and mine. 

Being a corporate executive who may have made a bad business judgment does not make one a felon, or "deserving" of jail time.   As should always be the case, the government needs to resist the calls from "the street" for hands to be cuffed (since heads can't roll).    A reputation, once lost, is hard to rebuild.    Someone owes David Stockman an apology.    And let's hope more mistakes aren't made going forward.

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