Bob Barr

Feds Shouldn't Micromanage Corporations
The Atlanta Journal-Constitution

May 31, 2006

I've never met former Enron executives Kenneth Lay or Jeffrey Skilling, both of whom are awaiting sentencing for their convictions last week in federal district court in Houston. I did not sit through the multiweek trial that culminated in their convictions. I have not reviewed directly any of the reams of evidence introduced against them.

Finally, I know they are viewed by the public generally as villains of the first order for allegedly single-handedly causing the collapse of the multibillion-dollar energy trading company they ran. I write not to defend them or to criticize the federal lawyers who prosecuted them.

I do write to express serious misgivings about the direction in which the federal government is headed, in terms of federalizing both the running and the policing of corporations. I write to express concern with the massive federalization of corporate activity in America.

Corporations have, since the founding of our Republic, been considered creatures of the states, which charter corporations, set the rules under which they operate and establish and enforce regulations that their officers and directors must follow. There is, and has been since the stock market crash of 1929, an important role to be played by the federal government. Initially and for several decades thereafter, that role was largely limited to regulating by the Securities and Exchange Commission the sale of securities and stocks of publicly traded companies. The actual running of the corporations remained a jealously guarded prerogative of the states, and Congress largely deferred to them.

To be sure, publicly traded corporations and corporate officers were regularly prosecuted by U.S. attorneys for truly "federal" offenses such as insider trading, but states were left free to set and enforce norms of corporate behavior. In recent years, however, all that has changed, and the heavy hand of the federal government is becoming more and more the tail wagging the corporate dog. With increasing zeal and regularity, federal prosecutors are usurping the traditional state responsibility to prosecute actions by corporate officers, often for misdeeds that were not, at least until recently, considered federal crimes. Such actions as aggressive — but lawful — accounting practices, risk-taking and corporate puffery now routinely find themselves in the gun sights of the feds.

With the passage in 2002 of the Sarbanes-Oxley Act governing corporate board structure and behavior, the federal government has noticeably raised its profile in directing the actual running of America's corporations according to a national, one-size-fits-all model that tolerates little if any variance or independence.

Even before 2002, the number of acts for which corporations could be held liable under federal criminal laws was astronomical — well in excess of 300,000, according to some estimates. The universe of potential federal offenses now constitutes a landscape fraught with dangers for managers and officers of major corporations, wherever they may be headquartered or incorporated. It has become a minefield rendered considerably more dangerous in recent years by the aggressive approach to corporate prosecution mandated by the Department of Justice.

Corporate managers are being forced to proactively ferret out evidence of possible federal crimes by employees or officers and then turn over the evidence — and the employees — to the prosecutors. Failure to do so means the managers and their corporation will be prosecuted; intimidation with a capital "I."

Moreover, in recent years, the feds are relying increasingly on very expansive use of the long-standing federal fraud statutes. These laws have been on the books for decades, designed to uncover and charge persons engaged in true schemes or "artifices" to swindle investors. Now, however, they are being employed by federal prosecutors to target corporate managers and other business persons for using aggressive — but not illegal — accounting practices.

To raise every incidence of unethical or questionable corporate behavior to the level of a federal felony ought to concern us. Such treatment serves to diminish the role and responsibility of state regulators and legislators, reduces innovation and legitimate risk-taking, and significantly expands the intrusion of the federal government into the country's business life.

Before everyone — especially those who profess support for the principle of federalism — breaks out the champagne and toasts the Enron convictions, we ought to ask ourselves some sobering questions about whether this is really the direction in which we wish our nation to travel.

Mr. Barr occupies the 21st Century Liberties Chair for Freedom and Privacy at the American Conservative Union Foundation.