That's not to say there isn't a role for the cops. Markets are imperfect, and investors are limited in the justice they can mete out. Investors brutally punish companies in which they lose confidence. Much is made of WorldCom's collapse after it disclosed its $3.8 billion mistake. But that merely snuffed the company out. Its stock was already down 99 percent, from a high of $61.47 in June 1999 to 83 cents a share at the time the creative accounting became known. That news simply took it from 83 cents to zip.
But as harsh as investors can be with companies that misbehave, they cannot bring misbehaving individuals to justice. That's the role of the cops. Executives who crossed the line that separates creative finance from fraud -- a fact that can be established not by the press but only by a court of law -- need to pay with not only their wealth but also their freedom.
After all, if committing murder in D.C. or burglarizing apartments in San Francisco meant losing one's freedom, there'd be far fewer killers and burglars. And if defrauding investors meant going to jail rather than moving on to the next lucrative job or easing into a comfortable retirement, there would be a lot less of that as well.
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