Enron effect: the changed corner office

CEO trials, including two that begin this week, have raised vigilance against corporate wrongdoing.

The end is near - at least as far as prosecuting the most blatant corporate indiscretions of the Enron era.

This week, separate trials are scheduled to begin for two of the more prominent names on the government's list of pinstriped bad boys: Bernard Ebbers, former head of WorldCom, and Dennis Kozlowski, former CEO of Tyco International. Except for the upcoming trial of former Enron executives Kenneth Lay and Jeff Skilling, most of the marquee names will have had their day in court.

Experts say the trials already completed - and the jail sentences under way - have had a big impact on corporate behavior. Lawyers for white-collar defendants say that CEOs are now pressuring underlings to state earnings accurately. Thanks to Martha Stewart, executives are more aware of the dangers of lying to prosecutors. Corporate leaders also know that Congress now requires them to personally vouch for their companies' earnings statements.

In short, greed hasn't disappeared, but the path to riches is more likely to follow the legal road map.

"The government has largely accomplished its goal of changing corporate conduct in a major and significant way," says Kirby Behre, a former federal prosecutor who is now a partner at Paul, Hastings, Janofsky & Walker in Washington.

The change in attitude goes beyond the boardroom. Judges are now inclined to take corporate misdeeds more seriously. And the general public, which makes up juries, believes that white-collar crime is a serious offense. "The bottom line is that it's more perilous to be criminal defendants in a white-collar case than ever before," says Mr. Behre.

Despite these changes, the Securities and Exchange Commission will not have to start laying off its investigators. For example, only last week, the SEC charged Google, the online search firm, and its general counsel with violations of securities laws involving $80 million. Both settled the suit, agreeing to cease and desist from such behavior.

On the same day, the watchdog sued nine men who worked for the food giant Royal Ahold for allegedly signing false audit confirmations and sending them to the company's auditors. According to the SEC, the amounts totaled at least $700 million for fiscal years 2001 and 2002.

"The only thing the government can do with a heavy enforcement budget is slow down the pace of fraud but never erase it," says Christopher Bebel, a former SEC counsel and federal prosecutor. "The government is never going to have the capacity to bring a halt to fraud because greed ... will motivate businesspeople to cut corners in order to line their own pockets."

There has certainly been plenty for the public to read about. The most visible trial involved Martha Stewart, now serving time in a West Virginia penitentiary. But there has also been the trial - and conviction - of Arthur Andersen, the accounting firm involved in the Enron affair. The conviction resulted in the virtual dissolution of the company. Moreover, most of the men in the Rigas family, former owners of the cable company Adelphia, have been tried, and two have been convicted. And Jamie Olis, a former executive at Dynegy, an energy company, received a 24-year sentence for six counts of criminal conspiracy involving the company's earnings.

The public will be reminded of these corporate sins as the Ebbers and Kozlowski trials begin. The Ebbers case involves the collapse of WorldCom in the wake of the 2002 disclosure that it had misstated its earnings by $11 billion.

Mr. Ebbers built a tiny company into a global telecommunications giant that eventually included the discount phone company MCI. In 1999, the company's attempt to buy Sprint fell apart as the bursting dotcom bubble took down the telecom industry as well.

As the company's fortunes waned, it started to make misleading accounting entries. It told Wall Street analysts that revenue was increasing even though it was declining. Now, Ebbers is accused of lying about the company's finances.

"The Ebbers case strongly illustrates the government's interest in prosecuting those who would lie to either the shareholders or the SEC," says Steve Huggard, former chief of the corruption unit at the US Attorney's office in Massachusetts.

WorldCom's chief financial officer, Scott Sullivan, has already pleaded guilty to fraud and will be one of the main witnesses in the case. "This is potentially potent testimony when a fellow executive takes the stand," says Mr. Huggard, now an attorney with the law firm Palmer & Dodge in Boston. "Of course, Ebbers's lawyers will be saying Mr. Sullivan is trying to help himself to get a better sentence."

Ebbers's defense - which he explained on "60 Minutes" - is that he himself didn't know about the fraud. "Normally that doesn't fly under federal laws, which calls it willful blindness," says Michael DeMarco, a former Massachusetts prosecutor. "The question is, Should he have known?" says Mr. DeMarco, now a partner at Kirkpatrick & Lockhart Nicholson Graham in Boston.

The Kozlowski case, which also includes Mark Swartz, Tyco's former CFO, is expected to be shorter than their first trial - a six-month marathon that included such details as how Mr. Kozlowski got the company to pay for a $6,000 shower curtain and half of a $2 million birthday party for his wife in Sardinia. That first trial, in New York state court, ended last April in a mistrial after a juror received improper contact by phone and mail.

In the retrial, the two are accused of corporate theft and lying about the company's finances.

"The second time around, the advantage is to the defense," says DeMarco. "They know what the witnesses are going to say."

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