Commentary: Bad CEOs: Nowhere to Run, Nowhere to Hide

Since the wave of corporate scandals began a year ago, one question has loomed in the minds of investors and employees at now-bankrupt companies such as Enron Corp. and Global Crossing Ltd.: Will any top executives spend time behind bars--or, at the very least, have to give back millions in profits from the sale of stock in companies that are now all but worthless?

Just a few months ago, as execs armed themselves with high-priced lawyers and claimed ignorance of subordinates' misdeeds, it seemed the answer was: "Don't bet your shrunken 401(k) on it." Proving beyond a reasonable doubt that a CEO knew the books were cooked might be too high a hurdle for prosecutors, many legal experts said.

But now CEO defenses seem to be crumbling. Recent aggressive moves by prosecutors--including applying novel legal theories, brushing off antiquated state statutes, and using some old-fashioned legal heat--have increased the pressure on execs from Global Crossing's Gary Winnick and WorldCom's Bernard J. Ebbers to Enron's Kenneth L. Lay.

Winnick, for example, could be subject to an insider trading case with the release of documents showing that former CEO Leo J. Hindery Jr. had warned him as early as June, 2000, that the company was in dire straits--warnings that weren't made public. Less than a year later, Winnick sold shares worth $123 million. "If [prosecutors] can prove he knew the picture presented to him internally was materially different from the picture the company presented externally, he's got a problem," says San Francisco securities lawyer Richard M. Phillips. Winnick says he had no idea the company would fail, and that he sought legal counsel before selling his shares.

The know-nothing defense of former Enron CEOs Jeffrey K. Skilling and Lay also could be shattered soon with the Justice Dept.'s filing of a criminal complaint against ex-Chief Financial Officer Andrew S. Fastow. While neither is named in the complaint, prosecutors are clearly creeping up the chain of command. "Our strategy is straightforward," said Deputy Attorney General Larry Thompson on Oct. 2. "We aim to put the bad guys in prison and take away their money." Certainly, Fastow--who could face decades in prison--would like to turn the spotlight on his superiors. "Enron's board of directors, its CEO, and its chairman directed and praised his work," said Fastow lawyer John W. Keker after his client was marched, handcuffed, into a Houston courthouse.

Clearly, the squeeze is on--and not just by Justice. New York State Attorney General Eliot Spitzer on Sept. 30 filed an unusual civil lawsuit against five telecom executives, including Ebbers and Philip F. Anschutz, former chairman of Qwest Communications. Spitzer alleges that the five essentially took bribes--shares in highly sought initial public offerings. In exchange, they steered business to investment bankers at Citigroup's Salomon Smith Barney unit, where analysts arranged "payoffs" by issuing flattering research reports to pump up the price of shares the execs held. Spitzer further argues that by not disclosing these arrangements, the defendants defrauded ordinary shareholders. He seeks $1.6 billion in profits reaped when the CEOs sold shares.

Creative, yes. But will it work? Some experts think it's a stretch. By claiming that the Martin Act of 1921, a highly flexible New York state law whose boundaries have not been tested in court, does not require him to prove a quid pro quo, "Spitzer is definitely pushing the envelope," says former SEC enforcement attorney Gregory S. Bruch.

Still, you have to give Spitzer credit, says University of Texas law professor Henry T.C. Hu, for forcing everyone to rethink accepted customs. By placing the practice of "spinning"--the allocation of hot IPOs to CEOs who in turn sell the shares for quick profits--under a harsh light, Spitzer "has brought fear into the corporate setting."

Spitzer's unorthodox case has already achieved one thing: Spurring on the Securities & Exchange Commission, where more tradition-minded lawyers bridle at his aggressive moves. But despite tactical differences, both the SEC and Spitzer aim to punish corporate malefactors at the top.

Justice Dept. prosecutors are also getting more creative. Already, they've used the money-laundering statute, not securities laws, in a case against Enron financial employee Michael J. Kopper. This allowed prosecutors to freeze $12 million worth of Kopper's assets--and to obtain a court order to freeze $26 million of Fastow's assets. Such tactics normally are reserved for suspected drug dealers.

Federal prosecutors are also coordinating their actions in unprecedented ways. The SEC's Enforcement Div. and U.S. attorneys are working hand-in-glove by sharing information, much of it from company whistleblowers, about corporate misdeeds. That way, law enforcers can use multiple centers of prosecution to pressure lower-level employees, then climb the ladder to the executive suite.

On Capitol Hill, with midterm elections a month away and voters clamoring for high-level scalps, Louisiana GOP Representative W.J. "Billy" Tauzin is doing some arm-twisting of his own. Tauzin aims to undercut telecom CEO claims that they were unaware of attempts by underlings to swap network capacity to meet earnings estimates. Such swaps served little purpose but appear to have artificially enhanced revenues, according to investigators.

On Sept. 30, Tauzin's House Energy & Commerce Committee released a selection of Winnick's e-mails, including one from July, 2001, in which he told CEO Thomas J. Casey that he had discussed a $900 million capacity swap with Enron's Skilling. "The evidence seems to indicate he did" have knowledge about the swaps, says lawyer Phillips. To bring a securities fraud case, though, prosecutors must show Winnick had reason to believe the accounting treatment of the swaps was improper. Winnick denies wrongdoing.

Whether the action is on Capitol Hill, in statehouses, or inside courthouses, Corporate America's bad guys are watching closely as they suddenly find themselves a fat target of prosecutors.

By Paula Dwyer

With Wendy Zellner in Dallas, Christopher Palmeri in Los Angeles, and Dan Carney in Washington

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