Friday's New York Times reported, “Some are calling yesterday's Enron verdicts the end of the corporate scandal era,” but the item at left from the Associated Press already suggests that The Elliott Wave Financial Forecast was in line with a far different reality when it anticiated an even more serious scandal phase in February. Fannie Mae, rogue mortgage brokers, hedge funds and various commodity market participants have all been fingered as likely candidates for prosecutorial emphasis in issues of EWFF. Since they were in the thick of things through the last phase of the great peak, they should be the focus in the months ahead.
Of course, it's all just an extension of the first, so Enron remains the trail blazer. We pointed out several holes in the defense's case in our entry of May 17; the biggest one was the timing. Lay and Skilling appear to have missed the optimum window of opportunity (the Dow's May 10 peak) for acquital by about two weeks.
As one article put it, Enron "raised the curtain on an era of corporate scandal." The trial and conviction of Lay and Skilling opens Act II of the drama. An “overview” article in today’s New York Times illustrates why the next leg down is likely to mark an even more dramatic transformation than the first wave down. The Times notes that, at this point, white-collar cases are no longer “delicate affairs, where prosecutors worked hard not to treat wealthy and powerful defendants as anything as distasteful as, well, criminals.” Due to a “transformation that has occurred in recent years,” techniques used against the mob and in the war on drugs are being applied by prosecutions in “the once-genteel legal world of corporate wrongdoers.” These tactics include "perp walks" where the handcuffed defendant is brought in by law enforcement for booking, the squeezing of witnesses “with threats against family members and stints in solitary confinement,” and the indictment of those who fail to cooperate. Legal experts said the aggressive approach was “crucial to the government's securing convictions” of Lay and Skilling. The Times concludes that the case against Lay and Skilling shows “the laws for corporate conduct are being interpreted strictly” and that their “convictions could set a precedent that haunts other executives. In the past, some of the charges, particularly those against Mr. Lay, might not have survived in a civil trial. Today, subtle dishonesties can be part of a broader effort to construct a huge — and successful — criminal case.” As the next leg of decline begins, a whole prosecutorial infrastructure is in place.
This “transformation” is a clear result of a bear market in social mood. The defense team tried to get Lay and Skilling off by saying, “They aren’t mobsters; they’re upstanding members of the community.” But the strategy played right into the retribuitive force of a bear market, which always directs itself at the key beneficiaries of the preceding bull market.
Another problem was the defense's approach. As we noted last week, one tact was to blame "market forces," to say, in essence, that Enron was a victim of a fall that swallowed everthing in its path. But it probably wasn't lost on the jury that these were the same guys who took every advantage of the trend when it was rising. When Skilling and Lay later turned around and claimed to be blindsided by market forces, it just wasn't plausible. They were way too smart for that, decided the jury. When the defense pointed to the mob-style prosecutorial tactic and said, in essence, “Heh, they’re playing hardball,” the jib was up. It's hardball season and participants have to live the consequences just as they lived with the positve effects of the rise.
Sentencing comes on September 11, a key anniversary date for the bear market. |