Convictions for Enron Execs Would Be Hard Won

Although Enron Corp. may have destroyed thousands of documents, misled shareholders and left the retirement accounts of many of its employees nearly worthless, legal experts say the prospect of serious criminal convictions of corporate executives is far from certain.

Despite some recent success in corporate fraud cases, prosecutors must overcome daunting hurdles, including changes in federal regulation of insider trading, the vagaries of securities law and the sometimes conflicting agenda of congressional investigators, according to law professors, attorneys who specialize in white-collar crime and law enforcement officials.

Evidence that Enron destroyed documents related to the company’s meteoric collapse offers the most compelling prospect for a criminal case, suggesting possible obstruction of justice charges, legal experts and law enforcement officials agree.

But it could take years for authorities to build more serious charges of conspiracy, insider trading or securities fraud against Enron’s higher-ups, and even then it may prove tough to return convictions, experts predicted.

“Financial fraud cases are very hard to prove. [Executives] can say they made bad business judgments, but you have to prove unanimously and beyond a reasonable doubt that they deliberately intended to deceive” the public and their shareholders about the company’s finances, said Columbia University law professor Jeffrey N. Gordon.

Even as FBI investigators began descending on Enron’s Houston headquarters last week to probe possible crimes, they probably will confront several legal and political realities that could work to Enron’s advantage. Among the potential roadblocks:

* The entire U.S. attorney’s office in Houston has pulled out of the investigation because too many prosecutors are related to Enron employees, forcing the Justice Department to create a special task force that must start from scratch in probing the energy company’s labyrinth of partnerships.

* Democrats already have called for an independent counsel to probe Enron’s well-documented political connections to the Bush administration, but the demise of the outside counsel law in 1999 has muddied the process for determining how and when to appoint an outside counsel.

* A recent rule change at the Securities and Exchange Commission, authorizing prearranged sell-offs of executives’ stock, gives added insulation to allegations of insider trading and could provide former Enron Chairman and Chief Executive Kenneth L. Lay and other executives with a built-in defense.

* And Congress’ zeal to conduct high-profile hearings on Enron could complicate the use of testimony from witnesses who become part of the criminal probe, as happened in the Iran-Contra scandal. In that case, charges against Oliver L. North and John M. Poindexter were thrown out in 1990 because their prosecutions were deemed tainted by immunized congressional testimony.

Coordinating Immunity Offers

Justice Department officials have begun discussions with Congress on how to coordinate immunity offers that Congress might make to witnesses, such as David B. Duncan, the partner at accounting firm Andersen who oversaw the Enron account. Duncan, who since has been fired, invoked the 5th Amendment last week before a congressional committee rather than answer questions about the destruction of Enron documents.

The department hopes to blunt the effect that any congressional immunity deals would have on future criminal cases.

“We never like to see potential witnesses paraded before Congress, but that’s always a danger in a case like this,” acknowledged a law enforcement official who asked not to be identified.

Enron spokesman Eric Thode said it would be premature to discuss any criminal allegations, noting: “We’ll just let the investigations take their course, and, of course, we’re cooperating fully.”

Despite the obstacles that prosecutors face, authorities are buoyed by the recent progress they have made in several other high-profile financial fraud cases.

In Pennsylvania, the former chief financial officer of apparel maker Leslie Fay Cos. was sentenced last week to nine years in prison for inflating the company’s earnings by $81 million. The scheme forced the company into Chapter 11 bankruptcy protection for four years.

In San Francisco, former executives at health services giant McKesson Corp., are facing civil and criminal charges for allegedly concocting bogus revenue figures. The losses for the company’s shareholders: $9 billion.

And in New Jersey, in a case with even more telltale similarities to Enron, the former chairman and vice chairman of Cendant Corp.--a franchiser whose brands include Howard Johnson, Avis and Century 21--are awaiting trial on charges of conspiracy and securities fraud.

Authorities allege that Cendant, in perhaps the longest-running scheme of its kind, was “cooking the books” for more than a decade, with former Chairman Walter A. Forbes reaping $30 million as the company’s stock soared amid misleading financial reports.

Once irregularities in the company’s accounting were exposed in 1998, the value of Cendant’s stock plunged $14 billion in a single day.

Cendant and accounting giant Ernst & Young, accused of whitewashing the irregularities, agreed last year to pay a near-record total of $3.2 billion to shareholders who claimed they were defrauded by the scheme.

But Forbes and former Vice Chairman E. Kirk Shelton, who have declared their innocence in the affair, are not expected to go to trial until late this year, about 4 1/2 years after the scandal first broke. That arduous legal path is testament to the difficulty of bringing such complex financial fraud cases, law enforcement officials say.

“It’s a brutally hard case,” said one official close to the Cendant prosecution. “It takes a special accounting knowledge, it’s an incredible paper trail, and you have to have cooperators. We had [three] people pleading guilty, all the ones just below the top. . . . Without them, it would be a much more formidable task” to prosecute the company’s top executives.

Reports of widespread shredding of Enron documents give authorities substantial leverage to try to persuade witnesses to cooperate, experts said.

“As a prosecutor, you are looking for evidence that the senior people had knowledge of the scheme,” said San Francisco attorney Stephen Meagher, a former prosecutor of white-collar crime cases.

“And typically, when you find documents were being destroyed, that answers the question. That means certain people were aware of problems and they were determined to destroy the evidence. It’s the prosecutor’s dream come true because it shifts the burden to the other side. They have to explain what they were trying to hide.”

Duncan, the Andersen auditor, has spoken with federal investigators at least twice, a sign that he may be willing to cooperate in exchange for a plea deal.

It remains to be seen whether Duncan or someone at Enron turns out to be the star witness prosecutors are seeking. But Columbia Law School professor John C. Coffee, a securities specialist, noted that “historically in white-collar crime cases, you have a trail of falling dominoes, and you start low and offer leniency to cooperate and get evidence against the higher-ups. I think you’re going to get a whole succession of people cutting deals here.”

The danger, however, is that such witnesses have a potential credibility problem: If they admit to destroying documents, will a jury believe their testimony fingering higher executives?

“Those aren’t necessarily the most credible witnesses on the stand,” said Paul Fishman, a former Justice Department official who specializes in white-collar defense.

Sending a Strong Message

Beyond the obstruction issue, law enforcement officials say possible charges against executives at Enron and Andersen could include securities fraud, insider trading, wire and mail fraud, conspiracy and even racketeering.

The case, if it can be proved, would hinge on a simple premise: that executives fooled the public and its shareholders into thinking the company was more profitable than it was--and enriched themselves in the process as the company’s stock went up in value.

The corporation itself faces possible indictment and criminal penalties, but legal observers said anything short of indicting top Enron executives could be seen as a failure in the eyes of the public.

“Indicting a bankrupt company achieves next to nothing,” Coffee said.

Indeed, Duke University law professor James D. Cox said indicting Enron executives would send a strong message.

“If they are serious about eliminating financial fraud, this is the battle the government needs to take on,” he said. “This looks to be a case of purposeful manipulation of earnings and purposeful concealment of debt. They created a truly false facade.”

Class-action lawsuits against Enron maintain that Lay made more than $100 million from stock sales before the company’s value plummeted. But Lay’s lawyers have maintained that many sales were from prearranged sell-offs, which could give him insulation under a rule adopted by the SEC in 2000 regarding what constitutes insider trading.

The so-called 10b5-1 rule holds that even if insiders possess sensitive corporate information, they can legally buy and sell company stock so long as it is part of a prearranged trading plan. The SEC and various courts have wrangled over how the new rule should be interpreted, and allegations of insider trading against Lay and other Enron executives could prove “a key test,” said Jill Fisch, a corporate and securities law expert at Fordham Law School.

Fisch compared the Enron probe to the financial scandal that led to the conviction of former junk bond kingpin Michael Milken and other Wall Street traders in the 1980s.

As in the Milken case, Fisch said, she believes Enron is “an impure case on a lot of legal questions.” But, she added, the public backlash--fueled by headlines about document shredding--may be enough to drive the investigation in the absence of clear law.