Corporate & Securities Law

Jail time for backdaters

I’ve blogged fairly extensively about backdating, including serious questions about whether and when it was wrong at all, and even more serious questions about whether it should be criminalized.  Among the specific issues are whether any misrepresentations were material to investors.  And then there’s the epidemic of prosecutorial misconduct that has occurred in these cases.

One cases in which prosecutorial misconduct was alleged was the Bruce Karatz/KB  Homes case. The case has nevertheless gone to trial and conviction, and now comes down to sentencing, as discussed in today’s WSJ.  

The question right now is whether Karatz should go to jail for 6.5 years as the U.S. Attorney’s office has argued or get probation and home confinement as the U.S. Probation Office has recommended. The jail recommendation is based on Karatz’s $11 million of supposed gains, supposedly at KB Home’s expense.  The Probation Office found no loss.  (The article also notes that of the 11 individuals convicted in this supposed nationwide crime wave only five have received prison sentences, none more than two years.)

The article suggests the real argument for long sentences isn’t the supposed investor losses but that “swindlers shouldn’t be treated better than dope dealers. Public outrage over scandals, such as Enron Corp., also played a role.”

I’m all for ending draconian sentencing of dope dealers too, and maybe even broad legalization.  But in the meantime my subject is corporate crime. 

Whatever one thinks of criminalizing agency costs in general, for all the reasons I’ve been writing over the last several years, backdating is the most egregious example. One reason is that it’s not clear anybody’s been hurt.  These cases are based on violations of economically illogical accounting rules.  Financial markets look through the accounting to the firm’s pro forma disclosures. 

Even if there is some possibility of investor loss, justice demands certainty before taking away a man’s liberty.  Doesn’t sound like that’s the case for Bruce Karatz.  Injustice to drug dealers doesn’t justify injustice to backdaters.

Full post as published by Truth on the Market on November 09, 2010 (boomark / email).