That’s the impression I get from trials like Ken Lay’s and now Angelo Mozilo’s indictment. I could be wrong - and I’d prefer if I was - and if so I apologize. But it seems to me that any time a company goes BK, optimistic and positive statements by the senior executives that would be routinely made as part of the ordinary BS that everyone engages in are retroactively defined as criminal.
My understanding is that advertisers cannot be prosecuted for their standard claims that their product or latest offer is “the best” or “highest quality” or “lowest prices” etc. And this, because everyone is expected to know that this is just a bunch of jive by the sellers. Plus, most of these claims are highly subjective in any event.
And the same goes for other areas of life as well. My father once predicted a recession and huge stock market decline and asserted that Allen Greenspan knows this too, but he can’t say it because if he did, that very statement would itself contribute to the economic downturn and stock market decline. Politicians routinely try to put their spin on events and how well their jurisdiction is going under their great leadership. And I’ll bet the very prosecutors who prosecute these chief executives do the same thing in their own endeavors (“we believe the case is going very well, and we think the jury will find that …”).
That’s how life is - there’s a certain amount of basic understanding that you need to have to get by, and that includes not simply relying on subjective claims by interested parties (“yes, this is definitely the car you are looking for …”).
ISTM that the trend towards prosecuting this type of activity in the specific case of CEOs is a combination of 1) a trend in society away from holding people responsible for their own actions and instead looking for some fiduciary on whom one’s bad fortune can be blamed, and 2) the desire by prosecutors to make names for themselves by taking down Big Names.
My position is that any knowingly incorrect statements of fact, should be prosecutable. But subjective and relative descriptions of how well things are going or what the risk is of adverse events going forward need to be taken with a lot of grains of salt by the public, and should not be a legal liability for the makers. So “we have $200M of second mortgages” when you really have $500M is (or should be treated as) fraud. “We have $500M but we think the risk to the company is low” is not.
The difference in this case is that Mozilo’s private correspondence reveals that he knew he was lying and he was also selling his stock to cash in before the inevitable crash. Essentially, he was lying to people in order to get them to keep buying the stock until he could sell his – he was getting them to give him their money through fraud. This is not the kind of ordinary BS that everyone engages in.
I think what Ken Lay did was deliberately misstate (or conspire to misstate, or something) the financial condition of the company in financial statements, so that wasn’t the usual B.S.
Anyway, I think it’s actually pretty well defined what a CEO (or any insider or corporate chief) can and cannot say. They can say, “I’m pretty excited about our prospects” or “We’re working hard to reduce costs”, etc. But, they probably cannot say, “we have hedged away our risks in MBS securities” when they haven’t. There all kinds of forward-looking statements they cannot make without some disclaimers.
CEOs can talk up their companies as long as they use language that implies they are talking about the future and that there are no guarantees. This is called a forward looking statement
Companies typically include “safe harbor statements” with any press releases to distinguish that their claims offer no guarantee for future ivestments.
Maybe a better question is why is the general public buying stock in companies without doing their due dilligence?
It’s understood that CEOs tend to inflate their companies. One thing they are not allowed to inflate is their financial statements. That’s what auditors are for. And the financial statements are supposed to include full disclosure of any event or potential event that may have an adverse affect on the company.
Angelo Mozillo seems like a slam dunk. He was talking up the stock while selling shares and interally that the sky was falling. That is clearly insider trading and misleading the public.
To the OP, there is a huge grey area but some things are black and white. A CEO can not say things are hunky dory to the public and internally have Chernoble melting down. Rick Wagoner at GM treaded a very fine line about needing bailout money and then at the congressional meeting saying they would run out of operating capital in a matter of weeks. You’ll notice Rick did not say things were great. Putting a positive spin on is acceptable but there is a difference between presenting bad news in the best possible light and lying about the bad news.
When I was a research analyst at UBS Tokyo, we were never ever allowed to use the word “rumor” as by SEC defination to use the word “rumor” was to “spread rumors.” Instead something like “unsubstantiated reports” was perfectly acceptable.