When CEOs Sugarcoat

Efforts by CEOs to boost confidence before the fall of companies such as Bear Stearns, Lehman Brothers, and most recently Wachovia, have all focused on offering comforting words before the fall, according to The New York Times.

Two weeks ago, Robert K. Steel sat with James Cramer on CNBC’s “Mad Money” and told him that there are some exciting prospects and “good things going on at Wachovia.” The interview took place only two weeks ago. Wachovia’s shares closed at $10.71 that day and Citigroup bought the company for $1 a share on Monday.

Andrew Ross Sorkin of NYT uses examples of similar strategies. Alan D. Schwartz’s television appearance before Bear Stearns was sold to JPMorgan Chase was reassuring. “We don’t see any pressure on our liquidity, let alone a liquidity crisis.”

Erin Callan, then Lehman Brothers’ CFO, told analysts that same month that the firm had raised enough capital. “We took care of our full-year needs at that point,” Callan said in a conference call before exchanging high-fives with her colleagues. Her performance moved Lehman’s numbers higher despite the fact that the company reported abysmal numbers.

Wachovia investors responded to Steel’s television appearance with unabated fury. Cramer had actually advised his TV audience to buy Wachovia, calling it one of the potential “winners” in the $700 billion bailout, apologized saying, “I screwed up.” He also noted that Steel was a friend of his for 25 years and that Steel may have taken advantage of that.

While Steel promised to keep shareholders’ interests in mind, Steel’s promise indicated that he might sell the company. Shareholders speculated, thinking that Morgan Stanley was a possible buyer. Steel hired Goldman Sachs to shop Wachovia around.

While no CEOs have yet been jailed throughout this process, Sorkin indicates that some kind of fraud could land some CEOs in jail for lying to investors.

“If there are ways people in this room go to jail, it’s probably through crimes of upholstery — the cover-up will kill you,” Joseph A. Grundfest, a professor of law at Stanford University who is a former commissioner of the Securities and Exchange Commission, at a conference Sorkin attended after the fall of Enron.