Fear began to overwhelm Weston L. Smith soon after Congress passed a law requiring top executives to vouch for the accuracy of their books.
Within days of the 2002 law, Smith refused to certify documents that he feared could expose him to prison time for inflating profit. Then, under pressure from co-workers, he wavered and agreed to sign them. Months later, the HealthSouth Corp. finance chief wavered again -- turning in the company he worked for and touching off the nation's first major prosecution of a chief executive under the new law.
Weston L. Smith, former HealthSouth finance chief, decided to expose the company's accounting fraud after the passage of the Sarbanes-Oxley Act.
(Gary Tramontina -- Bloomberg News)
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Since opening statements six weeks ago, the criminal trial of Smith's former boss, Richard M. Scrushy, has underscored how high the stakes have become for top corporate executives. Under the law, key executives at more than 12,000 companies are required personally to vouch for the numbers they provide regulators and investors in securities filings. If those numbers are phony, they face a maximum of 20 years in prison.
But that law is only now beginning to be tested in court.
Lawyers and governance experts across the nation are closely watching the trial in Birmingham as a bellwether for the strength of the new law. Members of Congress designed the measure as a way to hold executives accountable, after former chief executives at Enron Corp. and WorldCom Inc. claimed ignorance of huge frauds that helped force their companies into bankruptcy protection and cost investors billions of dollars.
For his part, Scrushy contends that he was duped by subordinates. While prosecutors have not produced documents tying Scrushy to the fraud, they have amassed more than a dozen guilty pleas from HealthSouth officials, including all five of the company's former finance chiefs, who agreed to testify against Scrushy in exchange for leniency in sentencing.
"An acquittal in this case would severely undermine the utility of the criminal certification statute in future prosecutions," said Michael L. Zuppone, a former Securities and Exchange Commission lawyer who now represents business clients.
The threat of prison time may be the biggest force driving business leaders to promote good corporate practices in the past few years, experts said. Losing a case such as the Scrushy prosecution, in which the government has audiotapes of the defendant and so many corporate insiders lining up to testify, could help contribute to a growing backlash against government regulation of business interests.
"The certification symbolically brought home to CEOs and CFOs that it's not just a general idea of responsibility but that it's very specific," said Peter C. Clapman, senior vice president and chief counsel for corporate governance at TIAA-CREF, a New York investment firm.
So far, regulators have used the new requirement that top officials certify their companies' numbers to pursue a smattering of other cases. SEC regulators have filed at least six other civil enforcement cases against corporate officials using the measure, which is part of a broader package of corporate reforms known as the Sarbanes-Oxley law. Criminal authorities proceeded in at least two of those cases, now pending in federal courts in Oregon and New York.
