White-Collar Crime's New Milestone
Friday, May 26, 2006
If there was one case the government had to make to define this as the era of corporate accountability, it was Enron.
But the Enron Corp. tale was complicated, with labyrinthine partnerships and intricate accounting entries, and no documents directly tying the guys at the top to the decisions carried out by others. It was a tough case to be a must win.
When the jury returned its verdicts -- guilty on 25 of a combined 34 counts -- it was a clear win. Jurors refused to let slide the two former chief executives who had become synonymous with corporate corruption, and who tried to blame underlings, advisers, institutional investors and the media for the Houston energy company's spectacular 2001 collapse.
"The jury says, you're the boss," said white-collar defense attorney Charles A. Stillman.
The convictions of Enron founder Kenneth L. Lay and former chief executive Jeffrey K. Skilling cap the Justice Department's five-year battle to hold top executives responsible for a flood of accounting fraud and corporate failures that undermined investor confidence, put tens of thousands of people out of work and hit the savings of millions of ordinary people.
Enron's 2001 bankruptcy exposed failures across the system of corporate governance, from audit companies that lacked true independence and board members who failed to ask skeptical questions to lawyers and bankers who blessed questionable deals in exchange for whopping fees. It also resulted in major changes to the regulatory system, including a federal law that requires top corporate executives to attest to the accuracy of financial statements.
When Enron was followed by a wave of scandals at companies such as WorldCom Inc., Tyco International Ltd. and Adelphia Communications Corp., it was not clear whether prosecutors and the Securities and Exchange Commission would be able to cope with the complexity and sheer numbers of the cases. But government lawyers slowly built their evidence and, after initial setbacks, learned to streamline their cases for juries. They won convictions of WorldCom chief executive Bernard J. Ebbers, Adelphia Chairman John J. Rigas, domesticity entrepreneur Martha Stewart and the top executives of Tyco.
But none of them equaled the importance of Enron, where it all started and which involved the most complicated financial and legal schemes.
"The ordinary investor uses the word Enron to scare their kids," said University of Texas law professor Henry T.C. Hu. "These convictions are the end of a particularly important morality play. Everyone always thought that the Enron-Skilling-Lay trial would be harder for prosecutors . . . and yet the prosecutors won. That really helps in terms of deterrence."
Although the Enron convictions serve as a high-water mark for the government's efforts to crack down on high-level corporate lawbreaking, legal analysts cautioned that the case does not mark the end of white-collar crime. "Where there's money, there's going to be crime," said former U.S. Attorney David N. Kelley. "You never know what's going to surface."
For corporate executives still under scrutiny, the verdicts yesterday underscored the peril of defendants taking the witness stand in white-collar fraud cases.
As in many of the recent top corporate trials, prosecutors had few documents linking Skilling and Lay to the accounting maneuvers that hid billions of dollars in losses from investors. The case therefore came down to weighing the two men's credibility against that of the other Enron executives, who swore Lay and Skilling were involved.