Slowly but surely, the courts are working their way through America's once-backlogged white-collar crime docket. So far juries have convicted most of the marquee defendants, including WorldCom's Bernard J. Ebbers, Tyco International's (TYC) L. Dennis Kozlowski, and Adelphia Communications' (ADELQ) John Rigas. But several lower-level execs have won acquittals, such as Tyco's Mark A. Belnick, Bank of America's (BAC) Theodore Sihpol, and a few unheralded managers from Qwest Communications International (Q) and Enron. The media spotlight is now on the Birmingham (Ala.) courthouse where the fate of HealthSouth's (HLSH) Richard Scrushy is ever-so-slowly being determined. But it will soon shift to Houston, where the Justice Dept.'s showdown with Enron's Kenneth L. Lay, Jeffrey K. Skilling, and Richard A. Causey is set to begin on Jan. 17, 2006.
That landmark trial will conclude this chapter in business history -- and, for many people, define the whole era. Until it's finished, and all the other major defendants have exhausted their appeals, it's too early for either prosecutors or defense lawyers to declare victory in the battle over corporate crime. The tide seems to shift on nearly a weekly basis. Defense lawyers appeared to have the upper hand when, on May 31, the U.S. Supreme Court tossed out the conviction of accounting firm Arthur Andersen LLC -- a decision that will impede future corporate crime prosecutions even if it came too late to save Andersen and its employees. Next, New York Attorney General Eliot Spitzer lost his case against Sihpol on June 9. But prosecutors bounced back when they won convictions against Kozlowski and his lieutenant Mark H. Swartz on June 17, as well as long prison sentences for Rigas and his son Timothy on June 20.
As this courtroom seesaw continues, one thing is already clear: Legal tactics in white-collar cases are rapidly evolving. Both sides are learning from their mistakes and reevaluating conventional wisdom. Here's how the game is changing, from the start of a case to its conclusion.
For prosecutors the easiest path to a conviction traditionally has been to charge white-collar defendants with perjury, making false statements, or obstruction of justice. These comparatively minor crimes are much easier for jurors to understand than securities fraud or insider trading, and they don't require nearly as much heavy lifting to prove. That's why they were a potent weapon against Martha Stewart -- who wasn't even indicted for the underlying allegations of insider trading that originally brought her to the government's attention. That's similar to what happened to Credit Suisse First Boston's (CSR) Frank Quattrone. He was charged with obstruction of justice even though his real sin, in the eyes of most critics, was allegedly manipulating the market for initial public offerings. But the government's tried-and-true strategy will have to be reconsidered in the wake of the Supreme Court's Arthur Andersen verdict. In a unanimous vote, the justices raised the standards for proving obstruction of justice. The direct impact of the ruling will be fairly narrow: It will give Quattrone and perhaps a handful of others a better shot at winning their appeals. But the indirect reverberations of the Andersen verdict could be far broader. "The court is sending a message," says Ellen S. Podgor, a professor at Georgia State University College of Law. "Prosecutors have to think twice about using shortcuts."
2. PLEA BARGAIN
So far government lawyers have enjoyed great success by building cases from the bottom up. The idea is to bring charges against low-level managers first, strike plea bargains, then secure testimony that can be used against the top honchos. But this strategy has sometimes backfired when small fry didn't play along. Several midlevel managers have called the government's bluff, gone to trial, and convinced jurors that they were being unfairly picked on by prosecutors who were ignoring far more culpable figures. Consider the Justice Dept.'s case against four executives from Qwest. In April, 2004, a Denver jury acquitted the two lower-ranking execs of charges of artificially inflating revenue. One of them, Bryan K. Treadway, "was just overworked and overwhelmed," juror Barbara Carmichael told BusinessWeek. "He was totally out of the loop." She and other jurors found it anomalous that no charges had been filed against ex-Qwest CEO Joseph P. Nacchio. (They still haven't.) The Manhattan jurors who voted to acquit Sihpol on June 9 expressed similar reservations about Spitzer's case. So did the Houston jurors who in November, 2004, exonerated ex-Enron accountant Sheila Kahanek -- the one defendant who was not convicted in the so-called Nigerian Barge Trial. With intermediate managers' chances of winning acquittal improving, prosecutors should probably expect more resistance from them in the future.
3. PRE-TRIAL PRESS STRATEGY
Until recently, white-collar defense attorneys chanted the same refrain: "I try my cases in court -- not in the media." The logic behind this position seemed unassailable: to avoid antagonizing prosecutors, judges, and jurors who could make their clients' lives miserable. But some bold CEOs and their lawyers are bucking this conventional wisdom. Exhibit A is HealthSouth Corp. Chief Executive Scrushy. He has advocated his case on his personal Web site, sponsored a local television talk show hosted by himself that often features his attorney, and increased his visibility in the local religious community. It's unclear whether Scrushy's aggressive public relations gamble will pay off. Yet considering that government lawyers have supporting testimony from five former CFOs, Scrushy is surely giving prosecutors a more serious challenge than they anticipated. When Martha Stewart tried a far more modest version of this strategy, it didn't keep her out of jail, but it may well have helped fuel her post-prison popularity surge. As for Ken Lay, when his name is plugged into Google, (GOOG) the first, top-of-the-page link that appears is the paid-ad site kenlayinfo.com -- a slick offering featuring his court filings, profiles of his legal team, and a transcript of his interview on Larry King Live, among other things. If Lay and Scrushy succeed, don't be surprised if CEOs and other execs facing charges in the future consider adopting the same tactics.
4. COURTROOM TESTIMONY
Ebbers testified in his own defense and was convicted. Kozlowski and Swartz tried the same strategy, also to no avail. Based on these high-profile recent examples, some commentators have leaped to the conclusion that accused white-collar criminals should never risk speaking out in court because it exposes them to brutal cross-examination. But a deeper look at the record reveals the opposite lesson: Almost every exec who has been acquitted in major recent corporate crime cases has also stepped up to the witness stand. The list includes Tyco's Belnick, Enron's Kahanek, and Qwest's John M. Walker. In fact, Kahanek's attorney received an e-mail from one of the jurors after the trial. "We liked Sheila for her courage to get up on the stand," the message said. "It appeared that you did not overcoach her, and she came off as believable." This isn't to say that testifying is without risk for accused execs -- just that silence may be equally risky.
When cases end with a hung jury, as they did in the first trials of Quattrone, Kozlowski, and Swartz, it is usually portrayed as a big loss for the prosecution. But government lawyers rarely give up after one attempt. On the contrary, they have shown an enormous capacity in recent months to learn from their mistakes. After juries complained that the original case against Kozlowski and Swartz had too much irrelevant evidence, Manhattan District Attorney Robert M. Morgenthau's team simplified their presentation, cutting the number of witnesses from 48 to 24 and eliminating the notorious videotape of the birthday party in Sardinia for Kozlowski's wife. As a result, defense lawyers are discovering that it isn't enough to capture one juror and get a hung jury. They must win over all of them, earning an outright acquittal, to truly save their clients.
This new reality is forcing attorneys to reconsider the axiom that retrials favor the defense. That old way of thinking was based on the supposition that prosecutors lose the element of surprise in the second trial. But while this may still hold true in street crime cases, it doesn't apply in the world of corporate crime, says Wayne State University Law School professor Peter J. Henning. "What you get in drug cases is confidential informants, where the government won't reveal anything until the last minute because they are so fearful of people getting killed," he says. "You just don't have as many Perry Mason moments in a white-collar case."
Henning and Podgor recently created something they call the White Collar Crime Prof Blog. It has become a forum where the rapidly evolving issues in CEO defense are discussed on a daily basis. You can bet the lawyers representing the next generation of corporate crime defendants are avid readers.
By Mike France