A New Business Regulation

(Guest blogger: Mad Rocket Scientist from Afternoons With the Mad Rocket Scientist)

As we the taxpayers get ready to pony up yet another bailout to cover the destruction of wealth caused by careless and criminal individuals, I propose, in the spirit of Ted’s new rules, that we need a new business regulation.

In addition to bringing back some sense of oversight, we need a set of penalties to befall those who mismanage the wealth of our nation. I propose that if a company hides debt or does any shady business practice that prevent investors from seeing the truth of a companies performance, then any and all employees who are responsible (from the guy who did it to everyone above him since they are responsible for those under them), including former employees who were employed during the time (unless they blew the whistle or turn states evidence) can have their wealth seized to cover the losses. Criminal convictions are nice, but I propose that this be a civil suit, not a criminal one (is it possible for the government to bring a civil suit?), or that once such malfeasance is exposed, everyone’s assets are frozen until such a time as culpability can be sorted out. If the seized assets are insufficient to the task, no one goes to jail, instead they will have a government garnishment on any and all wages and investments until they have paid back their share of the loss.

Why do I say current and former employees? Because the former boss of Bear Stearns was running the show when they were hiding debt, then left with a tidy sum, enough to buy a $2.8 million house.

Either way, the idea is that any person or organization (company, union, etc.) that destroys wealth through fraud, neglect, or deception is responsible for building that wealth back, and putting a person in prison does not allow for the creation of wealth. Also, fraud does not carry heavy prison terms and does not have much of a deterrent effect. If a money manager was risking a near lifetime of debt for himself and everyone above him, he might not be so eager to be stupid, and his bosses might not be so careless about what their people are doing.

We need to make the punishment fit the crime, and we need to make these people pay us back, since the wealth they destroy is not their own.

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6 Responses to “A New Business Regulation”

  1. Hazel Stone Says:
    March 28th, 2008

    Amen, brother.

    ReplyReply
  2. Jack Shaftoe Says:
    March 28th, 2008

    I believe we already have the ability to sue if we are individually harmed.

    I’m starting to wonder if you aren’t just a tad too anxious to have the government protect us. Once you give the government more regulatory power how are you going to keep the politicians and bureaucrats from abusing it?

    Wouldn’t it be better to give the government less money so they couldn’t afford to bail out businesses and individuals who made poor economic decisions?

    ReplyReply
  3. MadRocketScientist Says:
    March 28th, 2008

    If a money manager uses fraud or deception to hide the failing health of his accounts/company, then, once caught, it is the governments job to protect us. If I dump my life savings into a hedge fund and then ignore the financial data that tells me the fund is tanking and I lose it all, then I can sue, but the government will tell me (and rightly so) that I’m up shit creek and I’m on my own. However, if all the financial data comes back showing everything is roses, and then the bubble bursts and I find out I’m broke, then I should be able to sue (I honestly don’t think the government can bring a civil suit) and not only require that the government seize his assets, but allow those he defrauded to garnish his earnings until the debt is paid.

    The key is not that I want government protection, but I want the power to get my initial investment back in full, which requires that the government intervene on my behalf to a certain degree. As it stands right now, I can sue, he can declare bankruptcy, and all I can get is maybe a small portion of my money back (depending on how much he lost).

    ReplyReply
  4. Nate Says:
    March 28th, 2008

    In the case of stockholders, I believe the minority stock holders can bring a “derivative suit” against the company and possibly even it’s leadership, directly. As the stockholders are already behind the “corporate veil,” I think they can go directly after the people running the company. (Where, in contrast, people outside of the company’s shareholders can only sue the company, not the individuals running the company.)

    However, I’m an engineer, not a lawyer…so, the text above is likely rectally speaking.

    ReplyReply
  5. Jack Shaftoe Says:
    March 29th, 2008

    I am a firm believer in index funds. Proper diversification really does lower risk. I look at buying individual stocks the same way I look at walking into a casino and sticking a quarter in a slot machine.

    Should the government also get involved when my last quarter disappears in the slot machine?

    For the record, I have an MBA in finance, I’m a certified Financial Planner and have a series 7 brokers license. And I never recommend buying individual stocks.

    ReplyReply
  6. MadRocketScientist Says:
    March 29th, 2008

    The life savings bit was an example, often such frauds affect a much larger slice of the population than just the small time investor. It is the overall loss of wealth that becomes a problem.

    Again, it is not the risk aspect I am concerned about. A fund manager could just make an honest mistake or a bad investment and a lot of money could be lost very quickly with complete transparency in place.

    What I want to address are money managers (fund managers, CEOs/CFOs of large firms, etc) who hide the ailing financial health of a company or otherwise portray the financial health as significantly better than it is. As I understand the current law, a financial manager who loses money through fraud can be tried and convicted of fraud and get to spend a few years in jail. His assets can be seized through a civil suit and distributed to those who were harmed by his actions, but rarely do such assets come anywhere near covering the losses, and once the assets are seized and distributed, that is the end of the damaged parties ability to recover. I’d like to see a person convicted of such fraud forced to repay the initial investments in full, or as much as he can before death. I’d also like to see responsibility for such fraud to travel up the chain of command from the time the fraud can be detected in records until such time as the fraud becomes obvious to regulators (so no leaving six months before the bubble bursts with a fat severance and effective immunity).

    Maybe what I’m saying is that in the case of criminal activity, the corporate veil should be pierced so the individuals responsible can be gone after as well as the company itself. I also don’t want to see these people get jail time, I want them to truly repay their debt to society through work. This isn’t about protecting normal investment losses, just losses from criminal activity.

    ReplyReply

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