Nocera has a problem with Gladwell's Enron story

New York Times columnist Joe Nocera responded in Saturday’s paper to New Yorker writer Malcolm Gladwell, who had written in the magazine that he’s having trouble understanding why former Enron CEO Jeff Skilling was convicted and sentenced to prison.

First, Gladwell’s argument can be read here. The central thesis he makes is that Enron did disclose what it was doing, so its executives shouldn’t be punished.

Gladwell wrote, “The argument against the company, then, is more accurately that it didn’t tell its investors enough about its S.P.E.s. But what is enough? Enron had some three thousand S.P.E.s, and the paperwork for each one probably ran in excess of a thousand pages. It scarcely would have helped investors if Enron had made all three million pages public.”

Hogwash, says Nocera. He wrote, “But while Enron’s dwindling cash flow, poor return on capital and so on suggested internal problems, there are lots of poorly performing companies with similar problems. They are not necessarily out-and-out frauds, as Enron was. And that’s where Mr. Gladwell’s argument falls apart. His view is that more disclosure, which is what the Securities and Exchange Commission tends to strive for, would not have made any difference. But what Mr. Skilling (and others, including Enron’s founder, the late Kenneth L. Lay) were charged with was not hiding things in plain sight — but hiding things out of sight that would have exposed the fraud. That is, they lied to the investing public about the true condition of the company. And no matter how you slice it, that’s against the law.”

“The examples are myriad. Remember the Enron broadband business? The one that ‘generated’ tens of millions in reported revenue even though it never generated much actual cash? Mr. Skilling was among the Enron executives who hid the true nature of the broadband business, in one notable instance by omitting remarks about its troubles that were included in a conference call script that had been prepared for him. There was simply no way for investors to know that the company was lying about that business, no matter how close they parsed the financials.”

Read more here. (Times Select registration is required.) Rarely do you see one high-profile business journalist call out another.