It was Scott D. Sullivan's $15 million mansion--you know, the one with the six-car garage, 18-seat movie theater, and storage room just for fur coats--that got to Representative Richard H. Baker. When the Louisiana Republican read about the estate that WorldCom Inc.'s ousted CFO was building in Boca Raton, Fla., the outrage hit him: Why should anyone accused of bilking investors out of billions and bankrupting a company be allowed to slink off to a pleasure palace?
Sullivan is hardly getting off scot-free, of course. On Aug. 2, the Justice Dept. charged him with accounting fraud for allegedly boosting WorldCom's earnings by hiding nearly $4 billion in expenses. Sullivan denies wrongdoing. But under current law, his personal holdings are untouchable until Justice or the Securities & Exchange Commission wins a case against him. Until then, he is free to spend the $45 million in bonuses and stock options he has received since 1999. The same goes for the lavishly compensated former execs of other companies under investigation, such as Enron, Adelphia Communications, and Global Crossing.
To stop CEOs from living the high life while the SEC and Justice probe their former companies, Baker plans to propose legislation in September that would allow the government to seize assets and place them in escrow until their owners' innocence or guilt is determined. If Sullivan is convicted, says Baker, his estate would be auctioned off, like a convicted drug dealer's, and the proceeds distributed to shareholders.
Sound far-fetched? Maybe. Freezing and seizing the assets of high-level execs won't be easy. True, the courts generally have upheld laws aimed at confiscating drug dealers' assets prior to a conviction, and extending those laws to include securities fraud would be fairly routine. But CEOs have numerous ways to protect assets from the feds, such as walling them off in a child's trust, limited liability company, offshore investment, or, for that matter, a lavish house in states such as Florida. Baker's proposal, moreover, would have to win over skeptics who worry that it raises troubling due-process and Constitutional issues.
Congress is expected to see a half-dozen new bills in September that would change laws governing bankruptcies, pensions, and class actions, all with an eye toward recovering the allegedly ill-gotten gains of corporate execs. Money could reach into the billions, given the oversized options, bonuses, and golden parachutes granted in recent years. "There are enough zeroes now that it's beginning to get interesting," says University of Texas law professor Henry T.C. Hu.
Until now, the government's strongest weapon has been an arcane tool called disgorgement. When the SEC wins a court order or settles a case against officers for securities law violations, it can require them to give back their compensation, including stock gains. When the SEC settled a securities fraud case against software company MicroStrategy Inc. (MSTR ) in late 2000, for example, CEO Michael J. Saylor and two other executives agreed to give up $10 million from stock sales.
What's possible in theory often does not translate to reality, however. So far in fiscal 2002, the SEC has won orders forcing execs to disgorge $632 million. It has retrieved only $73 million of that, or just 12%. The main reason? Often, there's little money to collect because it has been spent on legal fees or squirreled out of sight of SEC lawyers.
The government might be able to collect more cash in the near future. A little-noticed provision in the Sarbanes-Oxley Act, which went into effect July 30, requires CEOs and CFOs of companies that restate their accounts because of "misconduct" to disgorge their bonuses and stock option gains--and the act does not require the agency to connect executives to the misdeeds.
One unintended consequence of the law, warns Del Mar (Calif.) lawyer Robert J. Mintz, is that it could encourage CEOs to move funds offshore without a trace--just in case. "Every CEO in the country is going to take steps to protect his assets," says Mintz. So despite the best of intentions, Congress' attempts to reclaim allegedly tainted loot may not add up to much.
By Paula Dwyer, with Amy Borrus and Dan Carney, in Washington and Mike France in New York