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Corporate Scandals Bring Calls for Jail

July 09, 2002|WALTER HAMILTON | TIMES STAFF WRITER

NEW YORK — 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.

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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.

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