Tuesday, December 7, 2010

Pulling Back the Curtain on Fraud Inquiries

Via DealBook.
Mr. Einhorn, who had his own run-ins with the government when he tried to reveal fraud at Allied Capital and wrote about them in his book, “Fooling Some of the People All of the Time,” says he believes the government consciously and strategically does not pursue cases against big companies and officers.
His theory is intriguing. Any case against a big company or officer, he says, inherently “penalizes the shareholders.” And the shareholders are the “little guys” whom the government is supposedly seeking to protect. Mr. Einhorn makes a good point. While the public lusts for the hanging of a corporate executive, the shareholders would also most likely take the big hit in the wallet.
To Mr. Einhorn, however, the government’s approach means shareholders look the other way instead of raising red flags themselves.
He said: “The problem with trying to give existing shareholders a free ride on whatever’s going on” — that’s what he argues the government is doing — “is that it takes away the incentive for existing shareholders to be worried when they see management misbehaving. It would be a much stronger, self-reinforcing, positive system if when shareholders saw management misbehaving, they were incentivized to call up management and say, ‘Please stop misbehaving or something bad is going to happen to my investment.’
“Instead, what they do, implicitly, is encourage the further misbehavior.”
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