Ebbers may be a crook, but he's no con man
(FORTUNE Magazine) – I had a nice letter not long ago from Eric S. Stein, a former businessman now in federal prison (a column I wrote on corporate crime seemed to strike a chord with him). Stein, whose moment of fame consisted of having his picture shown on America's Most Wanted, was in the business of conning investors. Many of his 90 employees spent their days on the phone promising short-term, high-yield, no-risk returns if people would just send money to be invested in TV commercials selling stuff like flea traps and water-filled dumbbells. Incredibly enough, the pitch worked. The financial setup was a simple Ponzi scheme, and when it ended Stein had separated 1,750 investors from about $50 million.
Now prosecutors charge that Bernie Ebbers, former chief of WorldCom, was in the very same business of conning investors. He faces the same basic charge, securities fraud, to which Stein pled guilty. It's the same central charge the feds recently made against former Enron boss Jeff Skilling. (All these cases involve assorted additional charges.) Three men facing the same criminal charge, yet one pulled off only a piddling $50 million fraud, while the other two were involved--whether culpably or not we shall see--in multibillion-dollar historic frauds in which millions of investors lost money. What made the difference?
Lots of things, arguably, but the difference that seems largest is the simple one of what they thought they were doing. Eric Stein understood clearly that he was swindling innocent people, and he has no problem today telling you what kind of con he ran and just how and why it worked.
Ebbers and Skilling, by contrast, apparently believed they were doing something of historic importance that was noble to boot. Ebbers was leading a genuine revolution--a revolution!--in the way the world communicated. The telecom boom of the late '90s involved the largest capital investment of all time, trillions of dollars industrywide, and Ebbers made sure WorldCom was in the forefront. He did that by continually acquiring other telecom companies (he even named his yacht Aquasition), using WorldCom stock as his currency. For that strategy to work, he had to keep his stock rising. Which meant he had to keep reporting higher profits--no matter what.
Skilling clearly believed he was the smartest executive on the planet and was doing nothing less than reinventing the way corporations make money. Under his inspired plan, Enron was not like any other enterprise in history. It was a new kind of financial machine that could spin, levitate, dance, and make profits and assets disappear and reappear, all at the maestro's direction. It was well on its way to becoming, in a phrase Skilling favored, the world's greatest company. And when your prodigious brain is discovering whole new principles of finance, who's to say when you've crossed the line? The very concept of the "line" is for other, smaller minds.
I don't think Ebbers or Skilling ever believed they were conning investors. We may never know for sure, and they may never even know themselves, so deep is the matter. But we have evidence. In Ebbers's case it's the fact that he borrowed over $400 million so he could continue holding WorldCom stock, even as it plunged to pennies a share. One thing a con man never, ever does is leave himself holding the bag.
As for Skilling, the evidence is the breathtaking grandiosity of his ambition plus, paradoxically, that awesome brain. For a Baker scholar from the Harvard Business School and a guy who became a McKinsey director in half the usual time, hoodwinking investors for personal gain just isn't that interesting. For him, getting rich was trivial. Building the world's greatest company--now that was interesting.
Though Ebbers and Skilling insist they are innocent, I believe--and this is the central question to be decided at trial--that both men knew they were putting out false financial statements. Not, however, to hurt investors. Oh, no--it was to help investors, to get the stock through a bad patch, after which their companies could go on to the greater glory that obviously awaited them.
Eric Stein, a straightforward con man with no illusions about his behavior, has three years left to serve on his eight-year sentence. It will be instructive to see whether Bernie Ebbers and Jeff Skilling, who believed themselves to be doing something utterly different from Stein, will in fact be judged to have done the very same thing on a gigantic scale--and if so, how their punishments will compare with his.