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The leaders of America’s largest corporations are the new public pi�atas in Washington. As scandal after scandal breaks, CEOs have become ready-made targets for the president, Congress, the media, and angry investors. But nailing them in court? That’s another thing. “The problem is, the higher up someone is, the harder it is to charge them with the actions of their underlings,” says Kirby Behre, a former federal prosecutor and now a partner in the D.C. office of Los Angeles- based Paul, Hastings, Janofsky, & Walker. In his July speech to Wall Street, President George Bush declared that “faith in the fundamental integrity of American business leaders is being undermined.” The following week the Senate passed a series of measures designed to enhance criminal penalties for securities fraud. Not to be outdone, the House responded with a bill that set even harsher punishments. The continuing avalanche of corporate scandals, combined with the plummeting stock market, overwhelmed efforts by business lobbyists to water down some provisions of the proposed law. The two chambers resolved their differences in conference committee, and quick enactment of the Sarbanes-Oxley Act was expected at press time. Both Bush and congressional leaders seemed to single out CEOs as the villains of the current crisis, and there’s certainly no shortage of examples to fuel their rhetoric. Bernard Ebbers, the former chief executive of WorldCom Inc., kept a palatial multimillion-dollar home in Mississippi and a 160,000-acre ranch in Canada even as his company was far sicker than accounting maneuvers made it appear. Dennis Kozlowski, the ex-CEO of Tyco International Ltd., recently pleaded not guilty to charges of tax evasion and evidence tampering. And, of course, there’s Kenneth Lay, the former chief of the disgraced and bankrupt Enron Corp. A High Hurdle While Lay and Ebbers may yet face criminal charges, prosecuting them won’t be as easy as Bush and Congress suggest. That’s because corporate chief executives are often removed from day-to-day operations. “It’s every prosecutor’s dream to go up the food chain as high as they can,” says Behre. “But there’s not going to be fingerprints on the CEO. CEOs become who they are by being big-picture guys.” The key requirement in any corporate prosecution is establishing criminal intent. Government lawyers have to prove that a corporate officer had direct knowledge of a fraudulent transaction or cooked books. “You can’t prosecute someone [for something] if they don’t know it’s false,” says John Coffee, Jr., a securities law professor at Columbia University School of Law. Because the hurdle is so high, it is much easier to pursue cases in which a CEO was directly involved in an illegal transaction. “There had been a sense that criminal enforcement of securities laws was reserved for insider trading cases, Ponzi schemes, out-and-out fraud,” says Christian Mixter, a securities lawyer and a partner at the D.C. office of Morgan, Lewis & Bockius. But in the wake of the recent accounting scandals, executive liability may be sharply expanded. Already, the Securities and Exchange Commission and the U.S. Department of Justice appear to be broadening their enforcement actions. In June the Justice Department indicted four former and current executives of the Rite-Aid Corp., including ex-chief counsel Franklin Brown, for allegedly reporting more than $2 billion in fake profits. (The four have pleaded not guilty.) And in early July, Qwest Communications announced that it was the subject of a Justice criminal probe related to the company’s accounting practices. Adding to the momentum, in July the president announced the formation of a new corporate fraud task force within the Justice Department. A Changed Environment Clearly, the environment has changed. A few years ago, when former Sunbeam Corp. CEO Albert “Chainsaw Al” Dunlap fell from grace in the midst of a dramatic restatement of the company’s earnings, criminal prosecution never seemed a possibility. “At the time, there were no indications of a criminal action. We never had to address the issue of criminality,” says Dunlap’s lawyer, Donald Zakarin, a partner with Pryor Cashman Sherman & Flynn in New York. Even when the government has managed to convict a CEO, the penalties often seem minor. This past April a federal judge sentenced former Sotheby’s chief executive Diana “DeDe” Brooks, convicted of a price-fixing scheme, to six months’ detention-in her home. Former Sotheby’s chairman Alfred Taubman received just a year in prison. In the future, wrongdoers may not get off so easily. The Sarbanes-Oxley Act creates a new crime of investor fraud, designed to punish executives who knowingly or willfully publish misleading financial statements. The maximum penalty: up to 20 years in prison. That’s plenty of time for a corporate chieftain to learn a little accounting.

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