Convictions for Enron Execs Would Be Hard Won
January 28, 2002
The LA Times
By ERIC LICHTBLAU and DAVID G. SAVAGE
WASHINGTON -- Although Enron Corp. may
have destroyed thousands of documents, misled
shareholders and left the retirement accounts of
many of its employees nearly worthless, legal
experts say the prospect of serious criminal
convictions of corporate executives is far from
certain.
Despite some recent success in corporate fraud
cases, prosecutors must overcome daunting
hurdles, including changes in federal regulation of
insider trading, the vagaries of securities law and the
sometimes conflicting agenda of congressional
investigators, according to law professors,
attorneys who specialize in white-collar crime and
law enforcement officials.
Evidence that Enron destroyed documents related
to the company's meteoric collapse offers the most
compelling prospect for a criminal case, suggesting
possible obstruction of justice charges, legal experts
and law enforcement officials agree.
But it could take years for authorities to build more
serious charges of conspiracy, insider trading or
securities fraud against Enron's higher-ups, and
even then it may prove tough to return convictions,
experts predicted.
"Financial fraud cases are very hard to prove.
[Executives] can say they made bad business
judgments, but you have to prove unanimously and
beyond a reasonable doubt that they deliberately
intended to deceive" the public and their
shareholders about the company's finances, said
Columbia University law professor Jeffrey N.
Gordon.
Even as FBI investigators began descending on
Enron's Houston headquarters last week to probe
possible crimes, they probably will confront several
legal and political realities that could work to
Enron's advantage. Among the potential
roadblocks:
o The entire U.S. attorney's office in Houston has
pulled out of the investigation because too many
prosecutors are related to Enron employees,
forcing the Justice Department to create a special
task force that must start from scratch in probing
the energy company's labyrinth of partnerships.
o Democrats already have called for an independent
counsel to probe Enron's well-documented political
connections to the Bush administration, but the
demise of the outside counsel law in 1999 has
muddied the process for determining how and when
to appoint an outside counsel.
o A recent rule change at the Securities and
Exchange Commission, authorizing prearranged
sell-offs of executives' stock, gives added insulation
to allegations of insider trading and could provide
former Enron Chairman and Chief Executive
Kenneth L. Lay and other executives with a built-in
defense.
o And Congress' zeal to conduct high-profile
hearings on Enron could complicate the use of
testimony from witnesses who become part of the
criminal probe, as happened in the Iran-Contra
scandal. In that case, charges against Oliver L.
North and John M. Poindexter were thrown out in
1990 because their prosecutions were deemed
tainted by immunized congressional testimony.
Coordinating Immunity Offers
Justice Department officials have begun discussions with Congress on how to
coordinate immunity offers that Congress might make to witnesses, such as
David B. Duncan, the partner at accounting firm Andersen who oversaw the
Enron account. Duncan, who since has been fired, invoked the 5th Amendment
last week before a congressional committee rather than answer questions about
the destruction of Enron documents.
The department hopes to blunt the effect that any congressional immunity deals
would have on future criminal cases.
"We never like to see potential witnesses paraded before Congress, but that's
always a danger in a case like this," acknowledged a law enforcement official
who asked not to be identified.
Enron spokesman Eric Thode said it would be premature to discuss any
criminal allegations, noting: "We'll just let the investigations take their course,
and, of course, we're cooperating fully."
Despite the obstacles that prosecutors face, authorities are buoyed by the
recent progress they have made in several other high-profile financial fraud
cases.
In Pennsylvania, the former chief financial officer of apparel maker Leslie Fay
Cos. was sentenced last week to nine years in prison for inflating the
company's earnings by $81 million. The scheme forced the company into
Chapter 11 bankruptcy protection for four years.
In San Francisco, former executives at health services giant McKesson Corp.,
are facing civil and criminal charges for allegedly concocting bogus revenue
figures. The losses for the company's shareholders: $9 billion.
And in New Jersey, in a case with even more telltale similarities to Enron, the
former chairman and vice chairman of Cendant Corp.--a franchiser whose
brands include Howard Johnson, Avis and Century 21--are awaiting trial on
charges of conspiracy and securities fraud.
Authorities allege that Cendant, in perhaps the longest-running scheme of its
kind, was "cooking the books" for more than a decade, with former Chairman
Walter A. Forbes reaping $30 million as the company's stock soared amid
misleading financial reports.
Once irregularities in the company's accounting were exposed in 1998, the
value of Cendant's stock plunged $14 billion in a single day.
Cendant and accounting giant Ernst & Young, accused of whitewashing the
irregularities, agreed last year to pay a near-record total of $3.2 billion to
shareholders who claimed they were defrauded by the scheme.
But Forbes and former Vice Chairman E. Kirk Shelton, who have declared
their innocence in the affair, are not expected to go to trial until late this year,
about 4½ years after the scandal first broke. That arduous legal path is
testament to the difficulty of bringing such complex financial fraud cases, law
enforcement officials say.
"It's a brutally hard case," said one official close to the Cendant prosecution. "It
takes a special accounting knowledge, it's an incredible paper trail, and you
have to have cooperators. We had [three] people pleading guilty, all the ones
just below the top. . . . Without them, it would be a much more formidable
task" to prosecute the company's top executives.
Reports of widespread shredding of Enron documents give authorities
substantial leverage to try to persuade witnesses to cooperate, experts said.
"As a prosecutor, you are looking for evidence that the senior people had
knowledge of the scheme," said San Francisco attorney Stephen Meagher, a
former prosecutor of white-collar crime cases.
"And typically, when you find documents were being destroyed, that answers
the question. That means certain people were aware of problems and they
were determined to destroy the evidence. It's the prosecutor's dream come
true because it shifts the burden to the other side. They have to explain what
they were trying to hide."
Duncan, the Andersen auditor, has spoken with federal investigators at least
twice, a sign that he may be willing to cooperate in exchange for a plea deal.
It remains to be seen whether Duncan or someone at Enron turns out to be the
star witness prosecutors are seeking. But Columbia Law School professor
John C. Coffee, a securities specialist, noted that "historically in white-collar
crime cases, you have a trail of falling dominoes, and you start low and offer
leniency to cooperate and get evidence against the higher-ups. I think you're
going to get a whole succession of people cutting deals here."
The danger, however, is that such witnesses have a potential credibility
problem: If they admit to destroying documents, will a jury believe their
testimony fingering higher executives?
"Those aren't necessarily the most credible witnesses on the stand," said Paul
Fishman, a former Justice Department official who specializes in white-collar
defense.
Sending a Strong Message
Beyond the obstruction issue, law enforcement officials say possible charges
against executives at Enron and Andersen could include securities fraud, insider
trading, wire and mail fraud, conspiracy and even racketeering.
The case, if it can be proved, would hinge on a simple premise: that executives
fooled the public and its shareholders into thinking the company was more
profitable than it was--and enriched themselves in the process as the
company's stock went up in value.
The corporation itself faces possible indictment and criminal penalties, but legal
observers said anything short of indicting top Enron executives could be seen
as a failure in the eyes of the public.
"Indicting a bankrupt company achieves next to nothing," Coffee said.
Indeed, Duke University law professor James D. Cox said indicting Enron
executives would send a strong message.
"If they are serious about eliminating financial fraud, this is the battle the
government needs to take on," he said. "This looks to be a case of purposeful
manipulation of earnings and purposeful concealment of debt. They created a
truly false facade."
Class-action lawsuits against Enron maintain that Lay made more than $100
million from stock sales before the company's value plummeted. But Lay's
lawyers have maintained that many sales were from prearranged sell-offs,
which could give him insulation under a rule adopted by the SEC in 2000
regarding what constitutes insider trading.
The so-called 10b5-1 rule holds that even if insiders possess sensitive
corporate information, they can legally buy and sell company stock so long as it
is part of a prearranged trading plan. The SEC and various courts have
wrangled over how the new rule should be interpreted, and allegations of
insider trading against Lay and other Enron executives could prove "a key test,"
said Jill Fisch, a corporate and securities law expert at Fordham Law School.
Fisch compared the Enron probe to the financial scandal that led to the
conviction of former junk bond kingpin Michael Milken and other Wall Street
traders in the 1980s.
As in the Milken case, Fisch said, she believes Enron is "an impure case on a
lot of legal questions." But, she added, the public backlash--fueled by headlines
about document shredding--may be enough to drive the investigation in the
absence of clear law.
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