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Congress may only have itself to blame for the dearth of top executives facing jail time for corporate fraud. Federal prosecutors so far have been effective in going after those relatively peripheral figures who contributed to the corporate fraud that brought down major companies such as Enron Corp., WorldCom Inc. and HealthSouth Corp. But they have yet to bag the chief execs and chairmen ostensibly at the heart of these scandals. The latest illustration of this failure came last week. In Alabama, the U.S. Attorney has secured an agreement by former HealthSouth treasurer Malcolm McVay to plead guilty to accounting fraud for his role in inflating earnings. Also, former WorldCom chief financial officer Scott Sullivan appeared April 22 before a judge to plead not guilty to new charges of bank fraud and making false statements in an effort to obtain $4.25 billion in credit for the telecom. In another high-profile case, the U.S. Attorney in New York on April 23 charged former Credit Suisse First Boston technology banker Frank Quattrone with obstruction of justice for impeding investigations by a grand jury and the Securities and Exchange Commission into IPO share allocation practices. Still not facing prison time are former chairmen and CEOs such as Enron’s Kenneth Lay, HealthSouth’s Richard Scrushy and WorldCom’s Bernard Ebbers. The lack of prosecutions of top executives is no surprise, says Stanley A. Twardy, a partner at law firm Day, Berry & Howard in Stamford, Conn., and a former U.S. Attorney for the state. Federal law requires the government to prove that an executive knew of the fraud when it was occurring, Twardy said. For lower level employees who manipulated the books, that may not be hard to prove. But to convict a chief executive, prosecutors need subordinates to testify that the CEO was involved in the fraud, Twardy said. “You have to work your way up the ladder,” he said. Historically, prosecutors offer lower-level executives leniency in the sentencing phase in exchange for guilty pleas and cooperation in going after the big fish. But that no longer works. Congress has so strengthened the sentencing guidelines that executives have little reason to cooperate. Instead, the person is often better off taking his chance before a jury because even if he loses, he is unlikely to serve a substantially longer sentence. “The jail time they face even with cooperation is so great there is little incentive to cooperate,” Twardy said. That hurts prosecutors in two ways. First, they must devote limited resources to preparing for potentially lengthy trials. Second, they lose their best chance to get the top executive because testimony is significantly less valuable after a jury has convicted an official. “Once convicted, their use is much less,” Twardy said. “You have a finding by a jury that they are not credible.” So while Scrushy could evade punishment at least in the near-term, prosecutors are zeroing in on the bit players. HealthSouth auditor Ernst & Young LLP, for example, finds itself getting more embroiled in the controversy. At a hearing on whether Scrushy’s assets should be frozen, one E&Y accountant testified that despite receiving an e-mail last year warning about fraud at HealthSouth, the accounting firm could not find any wrongdoing. Another accountant testified that the firm did not intervene after a HealthSouth internal auditor reported being denied access to company records. On the positive side, E&Y got out of a legal jam. A federal judge dismissed a lawsuit by the Federal Deposit Insurance Corp. centering on the firm’s work for Superior Bank, which failed in 2001. While prosecutions continue to draw front-page coverage, activity continues to swirl around the accounting profession. The Public Accounting Oversight Board decided on Wednesday to require non-U.S. accountants who review the books of overseas companies traded on U.S. stock markets to register with the group by April 2004. European governments strongly oppose the controversial requirement, which still requires SEC approval. Copyright �2003 TDD, LLC. All rights reserved.

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