Warning to Executives: Honesty Is the Best Policy
By KURT EICHENWALD, NY TIMES, July 10, 2004

If there is any message that has been delivered by the government in its almost three-year battle against corporate corruption, it is this: The truth will keep you free.

Indeed, even if no further indictments or convictions are obtained in the cases, the government has signaled that there have been far-reaching changes in the expectations for truthfulness when corporate executives communicate with shareholders.

Prosecutors highlighted that point on Thursday, after the indictment of Kenneth L. Lay, former chairman and chief executive of Enron, on charges that he failed to be fully truthful with accountants, investors and employees in the weeks preceding his company's collapse into bankruptcy.

"Your constituents are owed complete candor," Andrew Weissmann, head of the Justice Department's Enron Task Force, said at the time of the indictment in what he described as a message to corporate America. "If you violate that trust you will be brought to account. No one is too powerful."

Almost to underscore the point, even as Mr. Lay was arraigned, John J. Rigas, the former head of Adelphia Communications, was convicted on charges of securities fraud, conspiracy and bank fraud. In essence, prosecutors charged that Mr. Rigas had used $2.3 billion in Adelphia funds for his own purposes and had lied to investors and banks about the company's financial condition.

The demands for frank, honest communications are a significant departure from the practices of the late 1990's, when relentlessly upbeat statements on corporate performance were often the products of rationalizations that trimmed away the uncomfortable or the unpleasant.

Often, corporations relied on the wiggle room created by the law to keep things cheery. Facts that were deemed immaterial - an often subjective standard of whether certain information would change the investing decisions of the public - did not have to be reported. Opinions, under a Supreme Court ruling, were not actionable absent direct proof that the speaker had knowledge of their falsity. And what is known as puffery - positive spin put on facts for the purpose of making them seem as good as possible - was just an accepted part of doing business.

Even before prosecutors got tough, Congress stepped in with legislation that required senior officials to certify the accuracy of their books, or risk severe penalties. It also set up new regulatory restrictions on accounting firms and required that companies spend a lot more time and effort assuring that internal financial controls are adequate.

Now, with a number of the recent legal cases, and particularly with the Lay case, experts said, the government has shown no tolerance for statements that served to deceive, even if they might have been allowed in the past. And that could radically change the nature of corporate communications in the future, particularly in the quarterly telephone calls held between corporate executives and securities analysts.

"If corporate executives and their lawyers read the Lay indictment, we are going to see a far more careful and constrained conversation in analyst conference calls, and I think that might be for the good," said John C. Coffee Jr., a professor at Columbia University Law School. "There is an awful lot of spinning that goes on in those calls."

Indeed, Mr. Coffee said, while there are a number of allegations in the Lay indictment that, as portrayed, do appear to involve misrepresentations of material facts, one of the most intriguing elements of the case is the number of fraud allegations that appear at first blush to involve statements of opinion, or distortions of information of limited materiality that, in the past, may have given rise to little more than a civil enforcement action by the Securities and Exchange Commission.

Among the statements cited by the government are Mr. Lay's assurance to employees on Sept. 26, 2001, that his "personal belief is that Enron stock is an incredible bargain at current prices," a statement at an employee meeting in late October that "our liquidity is fine," and a comment made on an analyst call in mid-November of that year that "I don't have anything we're trying to hide."