Enron's Legacy

Enron's collapse was the initial episode in a series of corporate fraud scandals that caused billions of dollars of losses, cost tens of thousands of jobs, and eroded confidence in the integrity of the nation's financial markets. Apart from these very tangible harms, the fraud scandals also contributed to cynical shifts in public attitudes about corporations and their executives. Thus, it was not surprising that Congress called for reforms to address systemic corporate governance failures, while at the same time regulators and prosecutors revised enforcement priorities and developed new strategies to combat large-scale fraud. In addition to increasing transparency and accountability in corporate governance matters, post-Enron reforms give regulators and prosecutors potent new enforcement tools, enhance interagency coordination and cooperation, and provide the financial support essential for the SEC to effectively perform its core regulatory functions. Despite significant post-Enron legislative and regulatory reforms and aggressive civil and criminal enforcement, some observers are skeptical about the pace and focus of the fraud investigations. Of particular concern are what some of them view as skewed prosecutorial priorities. Why, for example, was Martha Stewart on trial when poster CEOs Ebbers, Skilling, and Lay had yet to be charged? This article provides a context for examining these and related concerns. Beginning with Enron, it sets the stage by reviewing seven major financial fraud scandals that have surfaced in the past few years. It then considers important structural reforms that address regulatory and enforcement gaps that allowed Enron and its progeny to slip through the cracks. After evaluating post-Enron reforms, the article examines how - through timely and innovative enforcement strategies - the Justice Department and the SEC have responded to the corporate fraud crisis. It then critiques the criminal enforcement record and challenges several assumptions that underlie criticisms of the current fraud investigations. By examining the government's prosecutorial strategies in the context of Enron, WorldCom, and HealthSouth, the article demonstrates why common criticisms of the timing and direction of recent corporate fraud prosecutions are fundamentally misinformed.