More Time for Executive Crime

Even without President Bush’s call this week for stricter jail terms for executives who break the law, senior managers convicted of accounting fraud already were facing significant prison time as a result of beefed-up sentencing guidelines adopted last year.

The federal government in November stiffened prison sentences for white-collar crimes, particularly those involving large amounts of money. The new rules came in response to criticism that white-collar penalties were too lax and that offenders were serving only minimal jail sentences. The median sentence for fraud convictions in both 1999 and 2000 was just one year, records show.

The complex guidelines drew scant attention when they were enacted, but they could play a big role in what probably will be a spate of criminal charges against executives, experts say. The toughened rules also could help satisfy public cries for retribution against managers who are alleged to have enriched themselves even as investors and employees lost billions of dollars.

The Justice Department is investigating potential criminal violations at Enron Corp., WorldCom Inc. and other companies that have revealed massive accounting breakdowns. Prosecutors are examining whether chief executives and others fudged the books to push up share prices and dump stock options at inflated prices.

Under the new guidelines, executives accused of major accounting fraud could face prison terms of 20 years or longer if found guilty, said Ron Nessim, a partner at Bird Marella Boxer & Wolpert in Century City.

“These guys, under current guidelines, could go away for a long time,” Nessim said.

The changes were enacted by the U.S. Sentencing Commission, a federal agency created in 1984. The guidelines spell out a minimum and maximum sentence for each crime, tacking on additional prison time for factors such as the number of victims and size of their losses. Judges often--though not always--must stick within those ranges when meting out sentences.

The penalties were stiffened the most for cases in which victims lost enormous amounts of money, as has occurred with many of today’s scandals.

Under the old rules, for example, someone who committed a fraud costing more than $100 million would have received a sentence of 51 to 63 months. Under the new rules, it would be 121 to 151 months. If the fraud affected 50 or more victims, the sentence would rise to 188 to 235 months--about 15 1/2 years to 19 1/2 years.

“All the big-name scandals we’re seeing now would result in huge periods of incarceration because the guidelines are driven primarily by the amount of the loss involved,” said Kirby Behre, a partner at Paul Hastings Janofsky & Walker and co-author of an upcoming legal study of sentencing rules for business crimes.

The new guidelines apply to crimes committed since November. But the government could charge an executive with participating in a “continuing conspiracy” in an effort to qualify earlier crimes for sentencing under the new guidelines.

However, despite the stiffened rules, defendants can shorten their sentences, especially by cooperating with prosecutors.

In 2000, almost 19% of fraud sentences were reduced for such assistance, according to the Sentencing Commission. An additional 12% of prison terms were slashed for other reasons.

Potentially more important, it is extremely difficult to win accounting-fraud convictions, especially of CEOs.

It is tough for prosecutors to rebut CEO claims that they relied on the advice of accountants and lawyers and were not personally involved in bookkeeping details.

Nevertheless, judges and prosecutors may be loath to lighten sentences given the publicity many cases will receive.

“We’re going to see some star prosecutions where, if people were not on TV every day, [the defendant] would get a considerably lighter sentence,” said Warren L. Dennis, an attorney with firm Proskauer & Rose in Washington.

Defense attorneys argue that the proposals by Bush and legislators on Capitol Hill to toughen the guidelines even further would have little deterrent value because the new sentencing rules are so strict.

Bush has called for toughened sentencing guidelines for corporate officers and directors. A bill passed by the Senate this week would require the Sentencing Commission to raise the sentencing guidelines for obstruction of justice, and for fraud in which there are many victims or enormous losses are incurred.

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Past Indiscretions and Penalties

Sentences for white-collar criminals tend to vary widely. How some of the famous corporate wrongdoers of the recent past fared in the courts:

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Michael Milken: In 1989, the junk bond king from Drexel Burnham Lambert was indicted on 98 counts of securities fraud and racketeering. Milken pleaded guilty to six felonies including securities fraud and conspiracy in 1990 and was sentenced to 10 years in prison. He spent 22 months in federal prison camp at Pleasanton and was released in 1993. He paid $1.1 billion in fines and penalties.

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Charles H. Keating: After his Lincoln Savings & Loan toppled into bankruptcy in 1989, costing taxpayers $3.4 billion, he spent almost five years in prison on fraud charges. Some charges were ultimately thrown out.

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Ivan F. Boesky: The stock speculator was sentenced to three years in prison in 1987 for insider trading. He spent two years in jail and paid $100 million to settle federal civil charges.

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Barry Minkow: The ZZZZ Best Co. wonder boy from Reseda spent seven years in prison after the carpet-cleaning firm tanked in 1987 and Minkow was convicted of defrauding investors and banks.

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Bruce McNall: The former L.A. Kings owner in 1994 pleaded guilty to charges of fraud and conspiracy for defrauding banks of $236 million. He spent four years in prison.

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Dennis Levine: In 1986, the Shearson Lehman Bros. employee was accused of earning almost $13 million via insider trading. He served

17 months of a two-year federal prison term for securities fraud, tax evasion and perjury.

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Michael Monus: The former president of Phar-Mor was convicted in 1995 on 109 counts for masterminding a $1.1-billion embezzlement scheme. He was fined $1 million and sentenced to 19 years in prison.

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Researched by JOHN JACKSON / Los Angeles Times