WASHINGTON — Helping the government land the biggest fish has been paying off for the slightly smaller fry in the prosecution of high-profile corporate fraud by way of a yawning gap in their prison sentences.
Jeffrey Skilling, Enron Corp.’s former chief executive who became an embodiment of corporate corruption, was handed a 24-year-plus sentence on Monday. That was the toughest penalty by far in the catastrophic collapse of the energy giant. Skilling’s one-time protege at the company, finance chief Andrew Fastow — architect of the complex web of off-the-books partnerships that hid some $1 billion in debt — received a six-year jail term in September after cooperating with the prosecutors and helping them secure Skilling’s conviction.
The judge said Fastow deserved leniency because of his “exceptional” cooperation with the government.
“The lesson that comes out of the Enron sentences is that if ultimately you’re facing criminal charges, it’s fine to be high up in the company. Just don’t be at the very top,” said Robert Mintz, a former federal prosecutor who heads the white-collar defense practice at McCarter
English in Newark, N.J.
Prosecutors like to work from the bottom up, so for CEOs caught up in scandals, he said, “There’s nowhere to turn in the event of an indictment.”
Washed ashore by the wave of corporate scandals in recent years have been executive flippers who have cut deals, turning against and talking about their bosses who have taken their chances at trial. Chief executives are far more likely to go to trial, partly because of ego, the conviction they did nothing wrong, or because prosecutors are far less willing to cut a deal.
Another prominent pair, fallen WorldCom Inc. chief executive Bernard Ebbers and Scott Sullivan, the former chief financial officer, present a clear parallel. Ebbers got a 25-year sentence for orchestrating the audacious $11 billion accounting fraud that toppled the company he built from a tiny long-distance phone company into an industry titan. Sullivan, who admitted to providing investors unduly optimistic financial reports and agreed to testify against Ebbers, got five years.
It hasn’t always worked out that way, though. A stunning exception came in June 2005, when Richard Scrushy, the flamboyant founder and former chief executive of HealthSouth Corp., was acquitted of all charges _ after five of his former CFOs took the stand and implicated him. It was a stinging setback for the Justice Department prosecutors, whose case against Scrushy had widely been considered among the strongest in the pack of indictments arising from the 2002 corporate scandals.
Scrushy faced what amounted to a life sentence and could have been ordered to forfeit some $278 million in assets if convicted. Seven other HealthSouth defendants _ including four of the former finance chiefs _ got prison terms.
What lessons executives take from the last round of corporate scandals may soon come into view as prosecutors sort out the financial scandal du jour: the suspicious timing of stock options grants to executives at companies around the nation. The former finance chief of Comverse Technology Inc. pleaded guilty Tuesday to conspiring with ex-chief executive Jacob “Kobi” Alexander to backdate stock options and falsify financial statements of the voicemail software maker to pocket millions of dollars and conceal the fraud from shareholders.
David Kreinberg agreed to cooperate in the case against Alexander, who has been the target of an international manhunt. After allegedly transferring $57 million overseas, Alexander was located last month in Namibia in southwest Africa, where he was briefly detained before being freed on bail pending a ruling on an extradition request by U.S. authorities.
Kreinberg faces up to 15 years in prison and could be ordered to pay tens of millions of dollars in restitution. It was not clear what penalties could be imposed on Alexander if he were convicted, though he faces similar charges.
To date in the options granting scandal, at least 149 public companies have disclosed Justice Department, Securities and Exchange Commission or internal investigations of their option awards, according to an Associated Press review.
Rolling the dice on a trial can be risky for CEOs in cases where underlings have turned against them.
“There’s no alibi defense” in white-collar cases, notes Peter Henning, a professor at Wayne State University Law School in Detroit. “They’re cases about intent.”
That means executive defendants can be convinced that they did nothing wrong _ potentially fueling a lack of contrition that can hurt them at trial. Company employees a few rungs down can provide some clues into what was in the CEO’s mind, Henning said. And, without an alibi or DNA evidence as you would have in a trial of a violent crime, if jurors believe an executive is involved he may well be found guilty and sent to jail.
Besides the “cooperation discount” for executives who help the government convict a former colleague, there’s also a “lack-of-contrition multiplier” that can increase a defendant’s sentence, said Henning.
At his sentencing this week, Skilling stood before the judge and said that in terms of contrition and remorse, “... I can’t imagine more remorse.”
But he stuck to his story. He didn’t commit fraud and conspiracy, he said, didn’t use shady deals and accounting tricks that contributed to Enron’s collapse into bankruptcy, and wasn’t responsible for the loss of thousands of jobs, more than $60 billion in the value of Enron stock and over $2 billion in employee pension plans.
“I’m innocent of every one of these charges,” Skilling declared.