Follow the Money—to Prison
Sanjay Kumar, the former chief executive of Computer Associates (now known as CA) faced a federal judge on Nov. 2 and was sentenced to 12 years in prison for his part in the massive accounting fraud at the software maker. But in many important respects, Kumar's crimes and the lies upon which they were built played a secondary role in the court's assessment.
The sentencing process for white-collar criminals today has as much to do with money, i.e., investor losses, as with other factors such as remorse, community standing, or prospects for rehabilitation. Under guidelines adopted in the post-Enron crackdown, the amount of financial havoc wreaked by a rogue executive figures prominently into his or her sentence. Moreover, when the fraud stretches into the billions, as at Enron, Worldcom, and HealthSouth (HLS), the sentences rise to a duration that makes many legal experts question whether the justice system is shifting the role of deterrence into the realm of overkill.
For example, the 81-year-old founder of Adelphia Communications, John Rigas, faced 215 years in prison under the sentencing guidelines for his role in looting the cable operator. Rigas and his family took more than $2.3 billion in unreported loans from Adelphia coffers, according to prosecutors. In June, 2005, a federal judge sentenced him to 15 years, telling Rigas the punishment would have been far harsher if not for his age and poor health. "One shrinks from, no matter how horrendous the crime, the prospect of someone dying in a prison hospital," U.S. District Judge Leonard Sand said at Rigas's sentencing, according to Bloomberg News.
The former Enron boss, Jeffrey Skilling, has been sentenced to more than 24 years and must pay $45 million restitution. Worldcom chief Bernard Ebbers began serving his 25-year stint in September at a federal prison in Louisiana. The former high school basketball coach was convicted for helping engineer the $11 billion fraud at the telecom, still the largest in the modern era of accounting scandals. Tyco's (TYC) former chief, L. Dennis Kozlowski, is serving at least eight years, and possibly as much as 25, in upstate New York, after being found guilty of taking more than $400 million in company money for his personal use.
"In some cases, you might as well just write a bunch of numbers on a dart board, turn your back and throw a dart at it to come up with some of these numbers," says Daniel Reidy, a white-collar defense attorney at Jones, Day in Chicago and a former federal prosecutor.
That's why legal experts contend that, in many cases, sentencing guidelines drive defendants' choices, regardless of the facts. A loss at trial can lead to a draconian sentence that a plea agreement can avoid. Their poster child could well be Jamie Olis, an accountant in the tax department at Dynegy (DYN), the Houston energy producer. Olis was charged with wire, securities, and mail fraud for his part in a 2001 trading and financing scheme called Project Alpha that helped Dynegy fraudulently boost its cash flow by $300 million. Olis decided to stand trial and lost in 2003. His punishment? An astonishing 24 years, which raised eyebrows nationwide, even outside legal circles.
Taking "Full Responsibility"
"A problem with the sentencing guidelines in fraud cases is that they get ratcheted up with the amount of losses to the exclusion of other factors that are also relevant to the sentencing," says Gary Naftalis, a prominent Manhattan defense attorney. He also notes that the size of the loss is attached to all guilty defendants associated with the loss, not just principal players. In the Dynegy case, people closer to the fraud decided to cooperate with the government probe, pleaded guilty, and ended up with sentences of 15 months or less. A federal appeals court later deemed Olis' sentence excessive and in September the trial court reduced it to six years.
Kumar, the Sri Lankan native who rose to become president and chief executive of Computer Associates (CA), pleaded guilty in April to charges of securities fraud and obstruction of justice for his role in the $2.2 billion fraud at the software maker. At federal court in Brooklyn, N.Y., Kumar told U.S. District Judge Leo Glasser that he took "full responsibility" for his actions in the fraud. "I know that I was wrong, and there's no excuse for my conduct," he said, according to Dow Jones Newswires.
Besides the prison term, he also was ordered to pay an $8 million fine. Kumar pleaded guilty to helping backdate sales contracts to book revenue in so-called "35-day months" so the Islandia (N.Y.) company would meet its quarterly earnings estimates. When regulators began investigating Computer Associates' accounting practices, Kumar allegedly lied and tried to conceal the fraud. The company paid $225 million into a "restitution fund" for harmed investors to avoid prosecution. It also overhauled its leadership team.
Kumar's former employer declined to comment Nov. 2 on the sentencing beyond a previous statement. That said, the company is "a dramatically different organization than we were two years ago, when Mr. Kumar left."