Wire Fraud and Executive Pay
September 29, 2008
Part of any bailout will almost certainly include limits on executive compensation. The thinking (which is sound) goes as follows: If CEOs are coming to Washington for a hand out, they shouldn't expect a hand full of gold coins. Many economists have suggested that CEO pay limitations are a bad ideal. Alex Tabarrok, an economist who blogs at the must-read Marginal Revolution, writes:
If you think the situation is very dire and also that Wall Street is ruled by greed then it's a disaster as the captain may prefer to go down with his ship, rather than give up the golden parachute (life-jacket?). Thus, those who think the situation is very dire must be gambling on CEO altruism!
Unfortunately, Mr. Tabarrok missed an important issue - federal criminal law. A self-interested CEO would be imprudent to sink his ship for sake of his golden life jacket. Here's why.
Overzealous prosecutors will be looking to make their careers out of this crisis. As with Enron, there will be widespread prosecutions. There is a law that would perfectly cover the greedy CEO. In fact, it's the same law that was used to prosecute Ken Lay and Jeff Skilling.
Under the federal mail and wire fraud statutes, "the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services." 18 U.S.C. 1346 (here). A CEO has fiduciary obligations to his employer. In other words, a CEO must put the corporation's interest in front of his own.
A CEO who refused a buy-out deal in an effect to protect his pay could - and would - be prosecuted under the mail or wire fraud statutes. We thus do not need to rely on CEO altruism at all. Old fashioned self-interest will motivate CEOs to take any good deals that are offered.