TCS Daily

Jamie Olis's Tragedy, And Ours

By James K. Glassman - April 1, 2004 12:00 AM

While Washington was preoccupied with the melodrama of Richard Clarke, I was moved by a more obscure event in Houston that could have greater significance.

On Thursday, a 38-year-old Korean immigrant named Jamie Olis, with a wife and a six-month-old daughter, was sentenced to 24 years in prison for his role in a complex scheme to hide the difficulties of the company where he worked as a mid-level executive.

It was a brutal punishment for a relatively minor crime. The Associated Press, noting that Olis reaped no personal gain, called the sentence "jaw-dropping." Since there is no parole in federal cases, he will have to serve at least 20 years.

Jamie Olis was born to a Korean mother and an American soldier who abandoned them. He grew up poor in small, dusty towns in Texas, pulled himself up by his bootstraps, got a good education and joined Dynegy, Inc., a large energy producer, becoming a vice president for tax planning.

Olis helped concoct Project Alpha, which inflated Dynegy's cash flow in 2001. According to a Wall Street Journal story in 2002, the scheme relied on corporate heavyweights, including Citigroup, which provided a $300 million loan, and the once-respected and now-defunct accounting firm Arthur Andersen, which gave its official blessing.

The sentence -- the result of a recent stiffening of federal guidelines -- was out of all proportion. By comparison, the median term for murder is 13 years; for drug trafficking, four years; sexual abuse, three years.

The Olis sentence is just the latest manifestation of the hysterical reaction of politicians to the corporate scandals that broke in the fall of 2001. Olis is a tragic victim, but millions of Americans, many of them without jobs, are also suffering as the U.S. economy struggles under the weight of poorly conceived new rules -- with more on the way.

For example, the Financial Accounting Standards Board is about to make public a measure to treat stock options as an immediate expense when they are issued. As a result, many of the most innovative firms will drop options -- an incentive that has spurred greater economic growth. Meanwhile, our competitors in Asia are gleefully adopting options and luring some of the best high-tech minds.

The SEC is considering 17 new regulations that would add unnecessary burdens to mutual funds -- the most successful investment vehicles of all time. Mutual funds manage $7.5 trillion in assets -- up 150-fold since 1980 -- and are now used by half of U.S. families. The costs from the new rules would mainly be borne by small investors, who actually own the funds.

The Sarbanes-Oxley law features a mind-boggling list of new rules and penalties, including prison sentences for CEOs who certify financial statements that later prove incorrect. On Sunday, The Independent, a British newspaper, reported that the new chairman of Shell faces "potential criminal charges" that could mean he will "spend 20 years in jail" in a controversy surrounding oil reserves.

Also, in the 16 months after the enactment of Sarbanes-Oxley, the number of U.S. companies announcing they are going private increased 30 percent, according to Grant Thornton, LLP. "Going private" allows businesses to avoid most of the strictures of the new law, but it also deprives investors of the opportunity to own shares of the companies.

But the most dangerous fallout from the regulatory hysteria is the new reluctance of business leaders to take risks -- to expand their companies, to go out on a limb in virgin markets, to invent and promote innovative products and capital-raising projects. The penalty for failure today is not merely lower earnings; it is lawsuits, prosecution, huge fines and long prison terms.

Risk-taking -- what economist John Maynard called "animal spirits" -- built the U.S. economy. In an excellent new book, "Freedom Around the Corner," historian Walter McDougall shows how America's success came from "scramblers, gamblers, scofflaws and speculators." I don't condone law-breaking, but I worry that the new risk aversion is harming our economy and ultimately our character. We're heading down the road of Germany and France, with their 9 percent-plus unemployment, sluggish entrepreneurship and general decadence.

Risk aversion is a major reason for the slow recovery of jobs. Business leaders are in no hurry to take chances in today's political climate, and you can't blame them. That's the sad lesson of the Jamie Olis affair, and it hurts us all.


TCS Daily Archives