The rash of corporate scandals this year could mark a turning point in the way white-collar crime is viewed by the public and prosecuted by the government, legal experts say.
The popular refrain now is that simply fining executives for wrongdoing under civil statutes won't stop financial abuses. The threat of criminal prosecution — and prison — is the only effective deterrent, some say.
"We're not going to get the attention of corporate America until we hear the click of the jail door on the backsides of some of these executives who are manipulating the numbers," said James Cox, a Duke University securities law professor.
To achieve that, however, prosecutors will have to battle not just powerful defendants and their talented lawyers but history as well.
Despite what may appear to be monstrous financial fraud at companies such as energy trader Enron Corp. and telecom giant WorldCom Inc., it is notoriously difficult to win white-collar crime convictions.
The Securities and Exchange Commission, which can bring civil cases but has no power to press criminal prosecutions, referred 523 white-collar cases to the Justice Department for criminal investigation in the last decade, according to Transactional Records Access Clearinghouse, a research group affiliated with Syracuse University.
Justice Department lawyers rejected 292 of those cases, or more than half. They landed convictions in 135 cases, and lost 42 others. (The other 54 are in the pipeline, either still being tried or not yet formally declined.)
Of those convicted, 81 people went to jail.
In recent days, there has been talk in Washington about a new Justice Department task force that would work directly with SEC lawyers to pursue white-collar wrongdoing.
Today, President Bush is scheduled to give a speech in New York outlining a new plan to address corporate malfeasance. He is reportedly considering new statutes that would make it easier to criminally prosecute executives for financial fraud. Democrats in Congress are pursuing their own initiatives to tighten white-collar fraud definitions and penalties.
"We'll vigorously pursue people who break the law," Bush said at a news conference on Monday.
Prosecutors already have brought charges against two high-profile executives: In June, L. Dennis Kozlowski, the former chief executive of conglomerate Tyco International Ltd., was indicted for alleged sales-tax evasion, and Samuel D. Waksal, former head of troubled biotech firm ImClone Systems Inc., was arraigned on insider-trading and securities fraud charges. Lawyers for the two men have denied the charges.
Meanwhile, the government is furiously trying to build a criminal case against former executives of Enron. And Justice Department officials have said they are looking into WorldCom after the long-distance company said it misreported $3.9 billion in expenses, masking huge losses in 2001.
Convictions hard to get
Historically, however, convictions have been difficult to achieve in white-collar crime cases, for a number of reasons.
The cases are complex and dull to juries and time-consuming for prosecutors, who must put in far more research time than in other types of cases.
What's more, when the charges are criminal, the legal burden is higher than in civil cases. Prosecutors must prove beyond a reasonable doubt that an executive intentionally committed fraud.
Civil regulators, by contrast, must show only that a defendant was reckless.
Unlike in drug or murder cases, there may be little tangible evidence to wave in front of a jury hearing a criminal securities-fraud case. It's hard to disprove the claims of executives that they relied on the advice of experts or that they merely made bad financial decisions.
In its duel against accounting firm Arthur Andersen, for example, the government had a straightforward obstruction-of-justice case related to Andersen's handling of client Enron's documents. The shredding of documents was undisputed and a high-ranking Andersen partner pleaded guilty.
Yet the government only barely won a conviction last month.
In the late 1980s, criminal insider-stock-trading cases against the likes of Ivan Boesky made for "a simple, vivid story," with financiers furtively swapping confidential information about companies, said Peter Romatowski, former chief of the securities-fraud unit of the U.S. attorney's office in Manhattan.
The cases could be pieced together through trading records and phone logs.
Securities fraud tied to accounting misdeeds, with no secret meetings or hushed phone calls, "just does not have the same sex appeal" for juries, he said.
And even though key executives of some now-defunct companies sold millions of shares of stock before the firms failed, that alone is not a crime. It must be shown to be related to some fraudulent act.
In legal terms, there is no such thing as accounting fraud. In criminal cases, executives now typically are charged with securities fraud—meaning material misstatements or omissions in connection with the sale or trading of securities—or related charges such as mail fraud.
As with most white-collar cases, the government is outmanned by well-paid defense attorneys.
The U.S. attorney's office in Manhattan, by far the most experienced in white-collar crimes, has a total of 50 lawyers in its securities-fraud and major-crimes units, which handle these cases.
Nevertheless, prosecutors have some distinct advantages in today's cases, experts say.
The biggest is that public and congressional outrage is at a boiling point. That gives the Justice Department a mandate to be aggressive and devote extensive resources to prosecutions.
"People are going to see jail time and more of it for major white-collar offenses," said James Comey, the U.S. attorney in Manhattan.
Indeed, prosecutors now see securities fraud as a career booster, attorneys say.
"False financial statements are now a fad," Romatowski said. "There were a lot of financial-fraud cases that were gathering dust at the back of prosecutors' file drawers that are now getting dusted off and getting a high priority due to Enron."
New public perception
The changed public thinking will show up in judges and juries, experts say. Juries have often been sympathetic to white-collar defendants, seeing their crimes as infractions of highly technical laws that left few victims, experts said. Some judges have been reluctant to impose stiff sentences.
But with the stock market floundering and the pension plans of some major firms in tatters, the new perception is that white-collar crime sows extensive destruction.
"The result of these cases is people are going to see executives as no different than the person who robs 10 banks," said Cox, the securities law professor.
The Andersen case was encouraging in one aspect, said John Coffee, a Columbia University securities law expert: Though jurors were divided on what prosecutors deemed to be the main evidence, they sought out other facts to support a conviction, he said.
"When a jury is convinced something is wrong, they may sit in the jury room a long time sifting through the evidence until they can find something they all agree was wrong," Coffee said.
"By this point, the country is convinced we've entered into the private sector's Watergate, and that tends to make juries far more suspicious and hostile toward white-collar defendants than they would have been 10 years ago."
Prosecutors have another advantage: a ready-made motive for fraud, because of the enormous sums executives earned through stock options in recent years. U.S. attorneys are certain to paint their cases as morality plays, with greedy CEOs fudging their books to boost their stocks and inflate their own pay.
"The basic structure has a lot of sizzle," said Christopher Bebel, a former prosecutor who focused on economic crimes. Executives "got filthy rich and it will be easy for prosecutors to portray them as villains. That will hold the attention of the jurors."
The criminal investigations are being pursued so vigorously now in part because jail terms have come to be viewed as perhaps the only way to preempt executive fraud.
The SEC has historically imposed fines on the stockbrokers and investment firms it regulates. But monetary penalties are increasingly seen as ineffectual.
Arthur Andersen, for example, paid a $7-million SEC fine last year for its flawed audits of Waste Management Inc., but apparently didn't reform its handling of Enron's books.
"Criminal actions are essential when you're dealing with people in the income level of CEOs and [chief financial officers] of major companies," said Richard Breeden, a former SEC chairman. "If somebody is making $105 million a year, for him to consent to an injunction from the SEC that he won't do it again doesn't create adequate deterrence. You've got to put him in jail."
Yet whatever sentences are meted out are unlikely to be long. Former junk bond king Michael Milken, who pleaded guilty to six felony counts of securities fraud and other violations in 1990, served 22 months of a 10-year sentence. The average prison term last year in the cases of white-collar criminals referred by the SEC to the Justice Department was 28 months, according to Transactional Records Access Clearinghouse.
But for those accustomed to boardrooms and chartered jets, the specter of any jail time may scare them straight, some say.
"To a white-collar defendant, the prospect of criminal conviction and any jail time is horrific," said Bruce Baird, who headed the securities unit of the Manhattan U.S. attorney's office in the late 1980s. "I have yet to see a client who didn't take that seriously and who wasn't scared to death."