Slowly Circling CEO Suspects
When W.A. Drew Edmondson filed felony charges against WorldCom and its former CEO, Bernard J. Ebbers, on Aug. 27, the Oklahoma Attorney General seemed to be saying: If the feds won't step up, I will. Edmondson is tapping into rising public resentment that, two years after the start of a series of corporate scandals that shocked the nation, only one CEO has gone to jail: ImClone Systems (IMCL ) founder Samuel Waksal.
Meanwhile, the former heads of Enron (ENRNQ ) and WorldCom (MCWEQ ), the two biggest blowups, remain free. Although investors lost billions, the feds have yet to charge Ebbers -- who has maintained his innocence since the beginning -- or former Enron Chiefs Kenneth L. Lay and Jeffrey K. Skilling, who also say they've done nothing wrong. "The primary reason we decided to proceed against WorldCom was my disappointment with the sanctions that have been leveled to date at the federal level," says Edmondson.
Adding to the perception that those most responsible for hurting investors are untouchable, federal prosecutors have trained their early fire on what some see as lesser crimes. Take ImClone. Waksal is serving a sentence of seven years and three months for insider trading.
And domestic diva Martha Stewart, who sold 3,928 ImClone shares at a suspiciously opportune moment, is expected to stand trial in January on charges of obstructing justice. Stewart, who says she is innocent of any wrongdoing, also faces Securities & Exchange Commission charges of insider trading. Says Edmondson of Stewart: "She didn't damage individual investors the way people have been damaged by Enron and WorldCom."
Have the feds been sitting on their hands? The SEC and Justice Dept. insist that they are moving as quickly as is prudent. And there has been progress. The federal trial of former Adelphia Communications (ADELQ ) CEO John J. Rigas for fraud and self-dealing is set for January. He denies the charges. And observers believe Richard M. Scrushy, the ex-CEO of HealthSouth (HLSH ), will probably be indicted soon for his role in what prosecutors have called a scheme to boost the company's stock price. Scrushy says he has done nothing wrong.
Even the Enron and WorldCom cases are coming along, say Justice insiders. "I understand that perhaps it looks like we're not going after CEOs," says Associate Deputy Attorney General William Mateja, Justice's point man on the President's Corporate Fraud Task Force. "But we are."
Both Justice and the SEC argue that it takes time to piece together criminal cases -- especially white-collar ones. Many are built from the bottom up, with lower-level executives targeted first in order to gain cooperation against higher-ups in plea agreements. Outsiders agree. "These rarely are cases that can be made with paper," says Harvard Law School criminal law professor Alan Dershowitz. "You need somebody to flip."
Certainly, prosecutors seem to have more motivation -- and means -- to go after the big cheeses these days. Mateja says cases that a decade ago took up to four years to file now take six months. As of May 31, Justice's corporate-fraud task force -- launched 14 months ago -- was handling more than 320 investigations, involving more than 500 people. At the SEC, says a top law-enforcement official, as many as 20 people have been working the Enron case, while 15 are on WorldCom full-time. Typically, the SEC puts three people on a case.
Given the extra resources, some outsiders wonder why more progress hasn't been made. "When there is that much firepower brought to an investigation, neither complexity nor time are viable excuses," says Jacob S. Frenkel, a former federal prosecutor and SEC enforcement lawyer who is now a partner at Smith, Gambrell & Russell. Frenkel specializes in white-collar crime and is a vocal critic of the Enron investigation. But even skeptics like him hold that WorldCom, HealthSouth, and other cases with more modest staffing are moving at a good pace.
As for complaints that the SEC has been slow to resolve charges against top officials, the agency points out that that's for good reason: With the two agencies working so closely together, the SEC doesn't want to muck up the criminal probes by moving ahead with civil charges that would reveal Justice's strategy, witnesses, and documents.
Given all the hurdles, how likely is it that the top brass will see their day in court? Here's the current state of play in the three largest alleged frauds:
It's not clear that the feds will ever be able to bring charges against Ebbers, who is still under investigation by the U.S. Attorney for the Southern District of New York. True, the feds have gone hard after Scott Sullivan, Ebbers' former chief financial officer. The latter has been charged with lying to obtain $4.25 billion in loans from company bankers, securities fraud, and filing false financial statements -- allegations to which he has pleaded not guilty. If Sullivan is convicted when he goes to trial next February, he could implicate Ebbers in hopes of reducing any possible sentence or fine.
Four other executives, who have pleaded guilty and are cooperating with Justice, may possibly do the same. But for now, no smoking gun tying Ebbers to the alleged fraud has surfaced publicly. "Absent Sullivan or someone immediately beneath him, it will be difficult to convict Mr. Ebbers," says Columbia Law School professor John C. Coffee Jr. "You have to show he knew this was going on. That's easy in the case of the CFO, because he has to sign off on it. It could be Ebbers is so insulated that he won't be brought up on charges."
Jeffrey Skilling and Kenneth Lay
That both men remain unindicted almost two years into the Enron investigation weighs heavily on Justice's Enron Task Force. To get to Skilling and Lay, Justice has been assiduously working up the chain. Last year, it won an obstruction of justice verdict against auditor Arthur Andersen.
It also has secured guilty pleas from two finance executives and two energy traders. Indictments have been obtained against former Chief Financial Officer Andrew S. Fastow; his wife, former Assistant Treasurer Lea Fastow; Treasurer Ben F. Glisan Jr.; broadband services CEOs Kenneth Rice and Joseph H. Hirko; and at least seven other former managers. All have pleaded not guilty.
So far, no documents directly linking Skilling or Lay to any alleged crimes have emerged. Many observers now believe that the only way for prosecutors to win guilty verdicts against one or both men would be to get help from one member of the small group of high-level managers that routinely dealt with Skilling and Lay. That means Fastow, Glisan, Rice, or Hirko would have to turn. "You are going to need witness testimony to bring the case against [Skilling or Lay] to life," says Philip H. Hilder, a Houston white-collar criminal defense attorney who used to work for Justice.
Getting Lay may be hardest of all. While Skilling, by most accounts, was deeply involved in the company's operations, "Lay only came back to Enron [upon] Skilling's sudden retirement," says Columbia's Coffee. "At the critical moment, he was [not hands-on]. It's not that easy to hold him responsible for all the special purpose entities."
All of Enron's indicted execs are scheduled to go to trial next year. Fastow and Glisan face charges of wire fraud, securities fraud, and money laundering. Rice and Hirko are charged with insider trading. Watch closely. The outcome will determine whether the Enron Task Force gets the energy giant's top players or comes up empty-handed.
Of all the investigations, HealthSouth's seems the most advanced. Although launched in March, it already has produced more indictments than the other two. Fourteen former executives have pleaded guilty to various crimes, ranging from maintaining false books and records to conspiracy to commit securities fraud. Four former chief financial officers are among those who have reached a plea agreement with Alice H. Martin, the U.S. Attorney for the Northern District of Alabama.
All face possible prison time and big fines, but the former CFOs who are presumably in the best position to implicate Scrushy face the toughest penalties. According to Justice, William T. Owens, who was still chief financial officer at the time of his Mar. 26 indictment, is staring down $5 million-plus in fines and up to 30 years in prison.
The rapid cooperation of such high-level managers has outsiders feeling that Scrushy, who maintains his innocence, could face indictment soon. "With Richard Scrushy, it's not a question of if he will be charged, but when," predicts former prosecutor Frenkel. To those who fear that justice won't be done if the top dogs don't face punishment, that would certainly be progress.
By Nanette Byrnes, with Mike France and Susan Zegel in New York and PaulaDwyer and Lorraine Woellert in Washington, D.C.