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With the revelation of WorldCom’s alleged $3.8 billion accounting fraud, the old joke that it’s easier to steal with a briefcase than a gun is no longer funny. But criminally prosecuting corporate executives is difficult and relatively rare. Legal experts say public outrage may change that — provided new laws or regulations are passed to help prosecutors pinpoint accountability. WorldCom, a communications company that is the parent of MCI, recently acknowledged that it categorized its expenditures as capital investments — a move that kept operating costs down and earnings expectations in line with Wall Street predictions. A week later, the company disclosed additional accounting problems suggesting that profits were overstated by more than $1 billion. The revelations, which experts have called a blatant fraud, have prompted an aggressive response. The Securities and Exchange Commission has filed civil fraud charges and the U.S. Justice Department is believed to have launched a criminal investigation. On June 27, President Bush called WorldCom’s behavior “outrageous” and Treasury Secretary Paul O’Neill, appearing on a morning television show, called for prosecution to the fullest extent of the law and strengthening the law to prevent similar future situations. There are no clear numbers on how often CEOs are criminally implicated in white-collar crime scandals, but recent cases show how slowly investigations proceed and how rare prison time is. For example, despite the public outrage about Enron executives’ actions, no one has yet been charged. Past investigations of corporate scandals at Sunbeam Corp., Waste Management Inc. and ICN Pharmaceuticals Inc. resulted in fines, but no criminal prosecutions. When top executives are indicted, it’s usually the ones directly responsible for the finances. Often, the CEOs are isolated from clear culpability because they can claim that they are not knowledgeable about or trained in finances. Assistant U.S. Attorney John Carney, chief of the newly formed Securities Fraud Unit in Newark, N.J., notes that often there are few e-mails or memos that can prove a CEO to have knowledge about illegal accounting practices, although he says their actions are often what drive the fraud. “CEOs are the ones saying ‘We need $30 a share.’ The CFO says, ‘We only hit $20.’ So the CEO says ‘Go back and get it.’ What do you think that means?” Carney is leading the prosecution of former executives from the Cendent Corp. Ex-Chairman Walter Forbes and former Vice President E. Kirk Shelton were indicted in 2001 on charges of using fraudulent accounting methods to overstate corporate income. In that case, three former financial executives who reached plea agreements with prosecutors are expected to testify against the executives. Rite Aid Corp.’s case is another in which corporate management faces serious repercussions. Four executives were indicted last month in an alleged accounting fraud scheme, including former CEO Martin L. Grass and former CFO Franklyn M. Bergonzi. The smoking gun in the case is a tape made by a former employee who secretly recorded his colleagues. John Coffee Jr., a professor of securities and criminal law at Columbia University Law School, points to the Rite Aid indictment as indicating that the times may be changing as far as the prosecution of corporate executives goes. “That’s in the Middle District of Pennsylvania,” he says. “It was not previously known as a hotbed of criminal activity by white-collar criminals.” He says the indictments “show a new aggressiveness by prosecutors interested in criminalizing white collar crimes.” HURDLES REMAIN Still, hurdles that existed pre-Enron for bringing these cases still exist. And in the rising tide of apparent corporate misdeeds — like the earnings restatements of Xerox Corp. and the allegations of insider trading against Martha Stewart — legal experts say that prosecutors have their work cut out for them. The first difficulty in prosecuting corporate fraud, says Gilbert Geis, a professor emeritus of criminology, law and society at the University of California, Irvine, is finding out about it. He notes that companies often report financial fraud only when bankruptcy or other factors make its discovery likely. The next difficulty, he says, is for prosecutors to establish intent. Geis says that past prosecutions, like that against Andersen, have been for related charges like obstruction of justice. “Intent is very difficult to pinpoint.” Geis also suggests that the cases, which are often complex and time-consuming and demand a lot of resources from the prosecutor’s office, don’t reap the same kind of benefits to prosecutors as other types of cases. “The drug busts are quick and dirty and make the headlines,” he says. “The Enron case has been going on for how long now?” Most legal experts say that prison time is an important incentive for curbing corporate executives’ criminal behavior. “One way to keep people honest is the fear of prison. What makes most people fill out their 1040s?” asks Richard Delonis, president of the National Association of Assistant U.S. Attorneys. “It’s the fear of getting caught doing something wrong.” Most legal experts agree that the threat of prison time is a valuable tool, but is only part of the solution. Coffee notes that when a CEO or CFO faces the possibility of making $50 or $60 million if they keep the stock prices up until they vest, jail as a deterrent may not be enough to keep them clean. And Frank Bowman III, a law professor at Indiana University School of Law who has studied white-collar sentencing, says that federal sentencing guidelines already call for long sentences for offenders involved in the manipulation, fraud or theft of millions of dollars. PRISON TIME ‘COMMON’ “One of the little known successes of the federal sentencing guidelines is that they’ve made it quite common for white-collar criminals to go to prison — some might say not enough, but they’ve forced judges to sentence them,” Bowman says. “You hear a lot of complaints about that in corporate circles.” While it’s difficult to speculate on the outcome of WorldCom’s top executives, former CEO Bernard Ebbers has come under increased scrutiny as to what he knew about the accounting practice that led to the restatement of earnings. Ebbers, who does not have a financial background, has stated publicly that he did not knowingly commit fraud, thereby establishing two defenses which lawyers say make it difficult for prosecutors to pin a CEO. That’s why some critics say the laws need to be changed — most forcefully through legislation. Bowman notes that Harvey Pitt, the chairman of the SEC, recently suggested that CEOs be required to sign off on the accounting statements. “The SEC wouldn’t be making this proposal if it were a routine matter to establish that CEOs had intimate knowledge,” he says. “Implicit in the proposal is the notion that at present, [CEOs have a] considerable amount of plausible deniability.” DUMP STOCK INCENTIVES? Coffee says that while the threat of prison would help, he sees a need to change the system fundamentally that created this problem. That means getting rid of the stock incentives in the first place — a task he says would be difficult. “That’s the line where the business community would fight hardest,” Coffee says. Plaintiffs’ lawyers suggest that the current scandal is a result of the Private Securities Litigation Reform Act of 1995, and the 1994 Supreme Court ruling in Central Bank of Denver v. First Interstate Bank of Denver. That ruling found that the securities law does not allow for aiding-and-abetting liability but requires the defendant to engage in manipulative or deceptive acts. “Suddenly, there was great comfort for these folks that they weren’t going to be sued. They knew the SEC was understaffed and underfunded,” says Melvyn Weiss, a partner at securities plaintiffs’ law firm Milberg Weiss Bershad Hynes & Lerach in New York. “They also knew that criminal enforcement is rare. And it’s very rare to have a confession or an eyewitness.” Weiss notes that the Supreme Court ruling and the law limited the exposure of companies and particularly auditors, reducing a level of scrutiny through civil lawsuits that might have curbed criminal behavior. The proof, says Weiss, is obvious. “Prior to 1995, you can hardly find a Fortune 500 company that was actually sued in a stock fraud, securities case. Post ’95, there are scores of companies,” says Weiss. Some, like Weiss and Geis, are skeptical about change unless the accounting firms are divested of a fundamental conflict of interest. “You’re being paid by the people you’re looking at skeptically. If they’re committing a crime and you call attention to it or even to irregularities, they’ll get a new accountant,” Geis says. News accounts in the days before the WorldCom scandal broke reflected the waning interest of Congress in passing legislation to reform the system. Both Weiss and Geis expressed skepticism that WorldCom will reinvigorate that movement. “These people were making enormous contributions to their campaigns,” says Geis. “Congress will do what it has to do to satisfy the public, but they will do what they have to do to get re-elected. And they need money for that.” FORECAST: MORE PROSECUTIONS But white-collar defense lawyers are anticipating more business. “I fully expect there will be renewed vigor in prosecutions by the Justice Department,” says Neal Sonnet, a Miami solo and former Assistant U.S. Attorney. “Some of these cases will be put on a much faster track.” And Carney, the New Jersey Assistant U.S. Attorney, says the inventory of cases is growing, in his office and in others. “There was a period of time when the jurisdictions would fight over these cases. There’s not much fighting now,” he says. Carney says that the nature of these cases has changed as well. “The Department of Justice has always prosecuted the chairmen of fly-by-night companies,” he says. “Now we are prosecuting senior executives at otherwise reputable corporations.”

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