CEOs in handcuffs

Saturday, July 27, 2002

From The Wall Street Journal

You can argue that handcuffing a 78-year-old man at his home at 6 a.m. after he had agreed to turn himself in voluntarily is prosecutorial overkill. And yet the arrests of former Adelphia CEO John Rigas, his two sons and two other executives Wednesday were useful public theater.

Though not yet proven in court, the charges in the 68-page indictment look to us like a clear case of bank and securities fraud. Finally, after months of scandal accusations and political rhetoric, the government is doing its job and holding individuals accountable under the law.

The spectacle of once-powerful men being arraigned - their ties, belts and shoelaces having been removed by marshals - will be a stronger deterrent to future fraud than anything now being passed in Congress. The markets even rallied at the news, if only for a day, maybe because investors prefer the concept of personal responsibility over politicians railing at business as a class.

Most business leaders aren't crooks, after all, and they understand that free markets and property rights require the rule of law to function. Honest businesspeople want genuine fraud to be prosecuted because they know markets work on trust. This basic capitalist truth has been ignored amid the media's recent guilt-by-association-with-all-business stampede.

The Adelphia story looks about as straightforward as fraud cases get. In many ways, the federal indictment describes an old-fashioned fraud of the kind that took place when individual families dominated most public companies. This is no Enron-type accounting black box. The Rigas family "looted Adelphia on a massive scale, using the company" as its "personal piggy bank," the indictment claims. John Rigas used more than $252 million in Adelphia money to pay margin calls on family loans, and he had the company lend him another $67 million in undisclosed loans.

Insider-dealing like this is sometimes possible in a family-run proprietorship. But if you sell stock to the public, it becomes a form of theft. Evidence of the necessary criminal intent is suggested by the indictment's claim that the Rigas family's use of the cable company's cash for personal benefit "was not presented to or approved by" the company board. It was not even disclosed to Adelphia directors who weren't Rigas family members. In short, this wasn't a corporate-wide scam; it was largely a Rigas family inside job.

This fact makes us far less enthusiastic about the SEC's decision to seek civil penalties against what's left of Adelphia. The non-indicted employees and shareholders didn't do anything wrong. And it won't help the economy to delay the day when Adelphia's assets become financially productive again.

The same goes, only more so, for the leaks out of Washington that the Justice Department is considering an indictment against all of WorldCom. If individuals committed fraud in that company's accounting, by all means indict them.

But indicting what's left of the entire company hardly punishes the offending management, which has already been fired. It merely punishes the remaining employees who are still trying to hold onto business, the creditors waiting to be paid via Chapter 11, and the more than 20 million WorldCom customers who might very well have to find new telecom service. How would any of that serve justice? A basic duty of government is to enforce the rule of law, so that everybody feels they are playing by the same business rules. Indicting individuals responsible for fraud fulfills that duty, while indicting entire companies for the sins of a few only victimizes some people twice. The spectacle of CEOs in not-so-golden handcuffs is a bracing enough public lesson.

This editorial was published in Friday's Wall Street Journal.

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