Sending CEOs to jail isn't easy
Enron's former finance chief pleads not guilty. US wants to sue his former bosses.
HOUSTON — The arraignment of Andrew Fastow this week on 78 counts of alleged corruption signaled the determination of prosecutors who are probing the collapse of Enron Corp., but also highlighted how difficult it can be to prosecute cases of alleged white-collar crime.
The "not guilty" plea by the former chief financial officer came more than a year after Enron's sudden financial implosion shook the corporate world to its core.
While it is not uncommon for white-collar cases to take that long for prosectors to build, this is no ordinary case. Beyond putting thousands of employees out of work and devastating shareholders, the energy giant's trajectory from seventh-largest US company to bankruptcy heralded a wave of accounting scandals and a changed public mood toward Big Business.
The pressure for government prosecutors to hold someone accountable for the debacle was, and remains, enormous. But getting convictions in such cases is rare, experts say, and Enron's financial dealings were particularly complex.
Sifting through years of company records, poring over thousands of accounting statutes, and then getting a jury to understand issues that even attorneys don't always grasp makes these thorny cases to prosecute. It's no wonder that so few CEOs have seen the inside of a prison cell.
But with the White House anxious to lock up corporate crooks, Fastow is the first big test at Enron. He is charged with elaborate accounting schemes involving various subsidiaries that enriched him while making Enron appear much more profitable than it really was. Next in their sights will most likely be former Enron CEOs Jeffrey Skilling and Kenneth Lay.
State and federal prosecutors also seem to be closing in on other failed CEOs, such as WorldCom's Bernie Ebbers and Global Crossing's Gary Winnick. Even insider-trading charges against good-life guru Martha Stewart appear imminent.
"The level of scams being alleged and the number of zeros involved are so much higher than people are used to that jail time seems inevitable," says Henry T.C. Hu, a corporate and securities law professor at the University of Texas in Austin. "But the real strength of the criminal-justice system is not in its ability to punish, but rather to deter."
Whether it will deter others is yet to be seen, but one thing is certain: The prosecution of Enron executives won't be easy, no matter how strong the resolve.
The government got a taste of what's to come this summer in its case against Arthur Andersen, accused of shredding documents related to its auditing of Enron. Despite what appeared to many to be a slam-dunk case for the government, it took a federal jury 10 days to reach a guilty verdict.
"The hallmark of Enron's success was its ability to construct cutting-edge financial transactions, which now present some unique problems for the prosecution," says Robert Mintz, a New Jersey lawyer and former federal prosecutor. "There are no other models that prosecutors can use to lead them through the series of Byzantine off-book partnerships and other transactions."
In addition, Fastow could be a very tough defendant. He's smart, eloquent, and armed with a bevy of high-priced lawyers.
Many speculate that prosecutors have been leaning heavily on him in hopes of getting information that can help them prosecute Mr. Skilling and Mr. Lay, just as they did with Michael Kopper, a former Enron executive who pleaded guilty in August and provided testimony against Fastow.
"In the end, the ability to build a case against the CEO often requires the cooperation of the CFO or other highly placed executives," says Richard Phillips, a San Francisco lawyer and former SEC official. Prosecutors are using this same ladder-climbing tactic in other cases, such as with WorldCom and Global Crossing.
Even if they are unable to get Fastow to turn on his former bosses, getting a conviction against him would be a major victory for the government.
"He's one of the three guys at the top," says Thomas Ajamie, a Houston securities lawyer.
Mr. Ajamie says these cases are so difficult because the laws in question are often ambiguous and accounting rules are voluminous. Government lawyers must not only become experts on the subject matter but teach it all to a jury.
Another challenge is proving criminal intent that CEOs willfully broke the law, instead of being simply being reckless or ignorant. They are generally well insulated from the day-to-day running of the company, work without documenting much of what they do, and hire legions of lawyers who specialize in minimizing any paper trail.