Atlas Faces Prison

On September 10, former Brocade CEO Greg Reyes is scheduled to report to prison, facing a sentence of eighteen months. The crime alleged against him was something called “backdating options.” Viewed in its worst possible light, that amounted to a minor sort of bookkeeping chicanery. Viewed more favorably, Reyes brushed aside a regulation universally acknowledged to be idiotic. And that is accepting the government’s allegations. According to Reyes’s own version of events, he simply relied on his financial department. No matter. He is being sent to prison.

Well, people say, it’s only right if he violated a regulation. But to say that ignores what Professor Larry Ribstein has called “the corporate crime lottery.” There are 10,000 commandments restricting business activity. Were they all to be enforced uniformly, business activity would simply cease. Business continues to exist only because the laws governing it are enforced in a partial and biased way.

Whenever the media starts to beat its drum about some new white collar “crime” that it has discovered, prosecutors do not haul in everyone guilty of the offense. Rather, they parade forth a tiny number of scapegoats from their vast range of possible targets. The only limitation on their selection is that none of the victims may be from among those select businessmen favored by media elites, such as Warren Buffet and Steve Jobs. (This limitation has been termed by Ribstein “ the Apple rule .”)

That is what befell Greg Reyes. The backdating of options became a business “scandal” on November 11, 2005, as the result of an article by Mark Maremont in the Wall Street Journal: “Authorities Probe Improper Backdating of Options.” U.S. attorneys across the country swung into action, looking to enhance their reputations by harpooning great white whales, and on August 10, 2006, Reyes became the first CEO to be criminally indicted for this trendy offense.

In the years since, we have learned that approximately 30 percent of all American corporations engaged in the backdating of options. And because we must suppose that, at each firm, there were at least several people who were aware of the backdating, we may safely conclude that the total number of prosecutorial targets during the great scandal years was equal to the entire number of corporations in the United States—thousands and thousands. So, how many persons have been sentenced to prison for the offense? Approximately 10. The criminalization-of-business lottery.

It is now four years since Greg Reyes was indicted, and nearly five since the Journal’s “exposé.” America is slogging through a Great Recession. Century-old investment banks have collapsed. Saving banks still topple every week. Two of the country’s Big Three auto makers have been nationalized. The health care industry, one sixth of the U.S. economy, is about to be fall under the heavy hand of government.

And one of the greatest high-tech CEOs in Silicon Valley history is being sent to prison.

Americans should consider the possibility that there is a connection.

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