Corporate Crime

JIM LEHRER:

Now, the possible effects of the Bernard Ebbers case and other recent high profile corporate criminal trials. Kwame Holman begins our coverage.

KWAME HOLMAN:

The 25-year prison sentence handed down yesterday to former WorldCom chief, Bernard Ebbers, was the harshest punishment yet in the recent wave of corporate scandals. A federal jury convicted the 63-year-old Ebbers in March on charges he hid $11 billion in WorldCom debt. Yesterday, Ebbers' lawyer reiterated that his client was not to blame.

REID WEINGARTEN, Bernard Ebbers’ Lawyer:

I think an innocent man got sentenced today. I think that the judge is a wonderful judge and I'm sure she tried to do what she thought was best, but the problem with this case from day one, Bernie Ebbers was transformed into a symbol, a distorted picture of corporate corruption. That's not Bernie Ebbers. The record is uncontradicted; this is a man who has lived a life that is unblemished.

KWAME HOLMAN:

But this former WorldCom employee said Ebbers's sentence was just.

HENRY BRUEN, Former WorldCom Employee:

I thought it was a good sentence because it sends a message that hopefully this type corporate behavior and misconduct is not going to be tolerated in Corporate America.

KWAME HOLMAN:

Ebbers was only the latest in a line of high-profile executives accused of corporate crimes since 2001. Last month, Adelphia Communications founder John Rigas was sentenced to 15 years in prison for siphoning millions from the nation's sixth largest cable company. Rigas' son, Timothy, the company's chief financial officer, was given 20 years for his role in hiding more than $2.3 billion in debt and misleading investors about the cable company's bottom line.

It was the scale of Ebbers' fraud that helped prompt Congress to pass the Sarbanes- Oxley Act to hold executives responsible for the financial goings-on at their companies. President Bush signed it into law in July 2002. But the first CEO tried for Sarbanes-Oxley violations, HealthSouth founder and CEO Richard Scrushy, was acquitted last month. Scrushy had been accused of looting the company of $2.7 billion and charged with 36 counts of conspiracy, falsifying records and money laundering.

Last month, Dennis Kozlowski, former chief of the manufacturing and services firm, Tyco, and the company's former financial officer were convicted of pilfering more than $600 million in corporate bonuses and loans. They await sentencing.

Enron's former chairman, Kenneth Lay, and former CFO, Jeffrey Skilling, go to court in January. They are charged with conspiracy and securities fraud, among other things, in the collapse of the energy giant. Both pleaded not guilty in a Houston court last year.

And today, a former Qwest Communications chief financial officer Robin Szeliga pleaded guilty to insider trading in part of that company's multi-billion-dollar accounting scandal.

JIM LEHRER:

Here to explore the implications of all this are: Jeffrey Sonnenfeld, associate dean of executive programs at the Yale School of Management; and Jacob Frenkel, a former federal prosecutor and attorney with the Securities and Exchange Commission, now in private practice in Maryland.

Mr. Frenkel, Bernard Ebbers got the stiffest sentence tow far of all these people. Did he deserve it?

JACOB FRENKEL:

Well, he's perceived to have deserved it, but I think in large part his sentence really reflects the failure of the government in the 90s to have been able to bring effective deterrent cases, such as this situation was created. So if the question is: Do I think a 25-year sentence is fair for what he did? No, I do think it's excessive. Is it understandable? Did the judge apply the guidelines correctly? There, the answer is yes.

JIM LEHRER:

Mr. Sonnenfeld, how do you feel about Bernard Ebbers; did he get what he deserved?

JEFFREY SONNENFELD:

I do think he got what he deserved. I think the punishment fits the crime. I will agree with Mr. Frankel that there is something different here. I studied executives coming out of prison for price fixing 27 years ago, and little by little we're starting to see people held accountable individually for their transgressions. Generally, securities fraud, product safety problems, problems that had to do with anti-trust, the corporations were punished, but the individuals got a slap on the wrist. It's very important to hold these individuals accountable, and that's what changes behavior. The law is late to catch up with what we know about psychology.

JIM LEHRER:

Mr. Frenkel, the former WorldCom employee who commented in the tape that Kwame just reported said this sends a message. What is the message of the Bernard Ebbers case, and the others, too, that have come before?

JACOB FRENKEL:

Well, the clear message is that if you engage in wrongdoing in the corporate board room, you stand the risk of going to jail for a long time.

JIM LEHRER:

And that's the new thing, as Mr. Sonnenfeld said, right?

JACOB FRENKEL:

I think that's correct.

JIM LEHRER:

That it isn't just the corporations that are going to go down; you're going to go down, too.

JACOB FRENKEL:

Exactly, and I think take that from the point I made — I was making before, and that is you now have the accountability that really was missing in the 90s. And I do believe had there been greater accountability through criminal prosecutions, which is what really has created this level of deterrence and sending the message that really was missing, had that occurred before, I don't think we would have seen the rash of — the rash of corporate fraud cases that we did see in the late 90s and the early part of this century.

JIM LEHRER:

Professor Sonnenfeld, why did it take so long for this to happen?

JEFFREY SONNENFELD:

You know, we've gotten so used it a pattern, I think, of thinking we can go after the corporation, and that was enough and somehow pressing the details on a likable-looking person. I mean, when you look at Bernie Ebbers, he doesn't seem like he is a dangerous person who is a violent, physical threat to society. He seems, obviously, very sympathetic, as we all feel sorry when we see somebody suffering.

We have to remember the victims of these kinds of frauds and be much more sympathetic to them. When we talk to chief executives, we run a school for chief executives — is overwhelmingly we hear they are very pleased with these difficult sentences, and they've called for them.

It's kind of — you remember when William James said at the turn of the last century, nothing so focuses the mind like the prospect of a hanging. This was a real clarion call that was important for them to say we're going to have an equal fair playing field; we're going to be able to echo this message down the line of the corporation, and they can draw a bright line in the sand between the 97 percent of the CEO's, which are honest – or more — hard-working people, and punish these rogue CEO's.

JIM LEHRER:

So based on your experience thus far then, Professor, the clarion call is being heard this a real world way by somebody who is tempted to do something here?

JEFFREY SONNENFELD:

It is. The message has been blurred at times, and obviously there's a setback with the Richard Scrushy decision in HealthSouth, and some other recent setbacks on the Siple, Bank of America, and questions about Mark Belnick, the general counsel of Tyco. The government has lost a few. The message was getting blurred. The more like Dennis Kozlowski like we see, like Bernie Ebbers, is a pattern showing you can marry ethics and the law and that there's enforcement behind it, teeth behind it. That message has to be loud, and it has to be clear to be taken very seriously.

JIM LEHRER:

Now, Mr. Frenkel, there are two kind crimes here that we are talking about. One of them is people just go in and steal from their own company. And then there's the other kind of crime, an accounting crime that Bernard Ebbers was essentially accused of, which is fooling with the numbers. And these are two very different kinds of things to prosecute and to gather evidence on, et cetera, right?

JACOB FRENKEL:

Absolutely. And I think that's the distinction that existed between, for example, Adelphia case which really did have a significant looting component to it, and the Ebbers case, which was a pure financial fraud case. And I think what we really have seen is the attention to these cases as an enforcement priority for the Department of Justice. I think that's the biggest difference that existed before.

JIM LEHRER:

Explain what you mean.

JACOB FRENKEL:

What I mean is in the 90s, for example, and even into 2000, 2001, what you had was the Department of Justice focused on money laundering, drugs, and if the SEC would try to take a case to most U.S. Attorneys' offices, they would have said, no, thank you; you can handle that.

Now there has been a sea change resulting in a change of priorities for federal prosecutors and interest in bringing these cases, and in truth, it also makes, for example, my life a lot easier when I'm counseling corporations because now I can say, look at what can happen to you. This is why you have to undertake a strong, compelling corporate compliance governance program.

JIM LEHRER:

As an attorney who goes into court and has on both sides now on these kinds of cases, the Bernard Ebbers defense was the one, oh, I didn't know all that awful stuff was going on down there below me. That defense now isn't going to work any more, is it, or as well as it used to?

JACOB FRENKEL:

It worked for Richard Scrushy. And I do think it has a chance of —

JIM LEHRER:

But Scrushy was accused of looting the company, not just fooling with the books, was he, a little bit of both?

JACOB FRENKEL:

It was a combination, but the real defense in the Scrushy case was Richard Scrushy was fooled and defrauded by the people who worked under him, so it really was that he was removed.

And I think the other test for that defense is going to be Ken Lay, who has a much more compelling argument because he was chairman at Enron, as opposed to Jeff Skilling, who was from the and had the day-to-day responsibilities.

At the end of the day, it really turns on want facts of the case, the jurisdiction in which the case is tried. I think that was another significant difference. I think the Department of Justice, for example, is going to try to focus more of these prosecutions in New York because of the success. But in –.

JIM LEHRER:

Why New York, just because people in New York are more — more part of that world?

JACOB FRENKEL:

I really think that's it. I mean, not only have they met with success, but the jury pool in New York is Manhattan, for the most part. So you have people who work in and around Wall Street, in and around Corporate America, and really understand these issues. And the Department of Justice has not met with that success elsewhere.

JIM LEHRER:

Elsewhere. Do you buy that, too, Professor Sonnenfeld. If you're going to go after one of these guys, do it in New York?

JEFFREY SONNENFELD:

Not necessarily. The trouble isn't even an issue of North, South, Wall Street, Main Street. That was a problem back 70 years ago in the kinds of security fraud we saw in that wave, where you had New England aristocrats that violated, perhaps positions of privilege in society.

The situation here is Towers Port, Pennsylvania; Birmingham, Alabama, it's all across the country, is that you can get home fried in your own district. The issue of venue, I think Mr. Frenkel is right, doesn't have to be New York. Washington is where much of the HealthSouth situation should have taken place because these were SEC issues, and what's a critical lesson here is these were people who were great beneficiaries of the American dream that turned it into a nightmare.

JIM LEHRER:

All right. Professor Sonnenfeld, I want to ask you the same question about the defense. What do you think now, what are you picking up in terms of CEO's and the background? Are they now getting the message hey, I didn't know what was going on, defense no longer is going to swing very well in court?

JEFFREY SONNENFELD:

Being perfectly candid with you, having studied this firsthand with people coming out of prison for 30 careers, the message they were getting from the general counsel often was, bury your records, burn the records, cover your trail. That is not the message that goes out now to CEO's.

Now the message is loud and clear, don't violate the law. In the Sgt. Schultz defense because it worked in a few distorting possible cases that we saw, say, with HealthSouth and others, Sgt. Schultz, you remember, from the TV show "Hogan's Heroes –

JIM LEHRER:

Got it. Right.

JEFFREY SONNENFELD:

— is that doesn't wash. If you're taking hundreds of millions of dollars as CEO, as these people were, you're willing to be accountable to receive the riches, and you have to be accountable for the missteps. Captains of the ship go down with the ship. At minimum there's criminal negligence at stake here.

JIM LEHRER:

And that message has gotten through?

JEFFREY SONNENFELD:

The message has gotten through loud and clear. It's important that prosecutors go after the big fish and not get distracted by minor missteps, and that's what's worried a lot of good-guy CEO because sometimes mistakes happen. Prosecutors have to work in a realistic way and not frighten the entrepreneurial spirit.

JIM LEHRER:

Do you agree with that, Mr. Frankel, that prosecutors have got to really be focused from this point on to follow up on this?

JACOB FRENKEL:

Absolutely, and I think not only — now we've seen prosecutors going after the lie-profile cases, the fact remains that there are a lot of issues in mid- and small-cap companies that they have avoided for years, and there is still fraud that conditions in that market, and you have victims across America in that market as well. So there are still frontiers for prosecutors to enter in the world of securities fraud, but in terms of the compelling message, that's been delivered through all these prosecutions, whether there have been acquittals or convictions.

JIM LEHRER:

Do you expect there to be more cases like these, or less, as a result of what's happened up to this point, as we sit here right now?

JACOB FRENKEL:

I think the answer is, for the time being, and for the near future, I think we will see fewer cases. I mean, I think, you go back and look — there were a lot of prosecutions in the 1980s for insider trading. You would almost think, you know, now, we're at a point where you have executives who either other were too young or forgot what happened in the 1980s.

JIM LEHRER:

This is a refresher course for them.

JACOB FRENKEL:

A compelling one.

JIM LEHRER:

Okay. Gentlemen, thank you both very much. We'll see what happens.