Payback on Wall Street (pg. 4)

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How does it all play out? Criminality is about deviance, so the more widespread undesirable conduct turns out to have been, the more difficult it becomes to treat it as criminal. The collapse of the Bear Stearns hedge funds in July 2007 was shocking, as was the demise of their parent company eight months later. Likewise, Fannie's, Freddie's, Lehman's, and AIG's failures were all stunners. But by the time Washington Mutual fell, indignation was beginning to flag. It does not appear that the subsequent near collapses of Wachovia and Citigroup (C, Fortune 500) - each once unimaginable in itself - has yet triggered any criminal scrutiny at all (although Golden West, which Wachovia bought in 2006, is reportedly being looked at).

Fairly or unfairly, those who came under scrutiny first - because their companies failed first - are likely to experience the greatest pressure. The reference point here is former CEO Greg Reyes at Brocade, who was convicted and sentenced to prison for backdating. Brocade came under criminal investigation in late 2005 after a disgruntled employee dropped a dime on it, well before the Wall Street Journal revealed, in March 2006, just how widespread options backdating was.

Though it later became difficult to distinguish what had happened at Brocade from what had happened at, say, Apple or Pixar, the latter companies appear to have been permitted to resolve their problems entirely through civil channels. (In addition, as the breadth of a scandal spreads, simple issues of investigatory manpower arise. Criminal cases are time-consuming to prepare, and, as the New York Times reported in October, the FBI just doesn't have enough agents to simultaneously fight terrorism and form a dozen company-specific investigatory battalions, each on the scale of the mighty Enron Task Force.)"

Undoubtedly a few out-and-out scoundrels will be exposed, and they will be convicted criminally. Most of these situations, however, will be handled civilly, by the SEC and plaintiffs lawyers, which is as it should be. And then, inevitably, there will be the sadder, closer calls. Some executives may have made misleading statements under trying circumstances - ones that had far graver consequences than anyone ever imagined, but that were misleading nonetheless. It may turn out that one of the many risks that these financial wizards mispriced was the risk of lying and getting caught. 

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