By Carrie Johnson
Washington Post Staff Writer
Wednesday, October 25, 2006
HOUSTON, Oct. 24 -- The sentencing Monday of former Enron Corp. chief executive Jeffrey K. Skilling ended the saga of the scandal-ridden Houston energy company and effectively closed the book on an era of high-profile corporate malfeasance.
Skilling's sentence capped a string of lengthy prison terms handed down to top executives for economic crimes, including WorldCom Inc. founder Bernard J. Ebbers, now serving 25 years, and Adelphia Communications Corp. founder John J. Rigas, facing 15 years pending appeal.
But Enron remains that period's signature scandal. The company's December 2001 breakdown ushered in a wave of corporate collapses that roiled investor confidence and prompted the government to enlist a special band of prosecutors and FBI agents to mount the most complex business fraud investigation in history. Their pursuit of top Enron officials helped change the way corporate wrongdoing is prosecuted and spurred companies to more aggressively police themselves.
Hours after a judge sentenced Skilling to more than 24 years in prison, the leaders of the Enron Task Force announced that they would close up shop, saying their mission was mostly complete. But even as officials packed their files and prepared for other jobs in government and the private sector, there were fresh signals about the direction post-Enron corporate crime enforcement would take.
A new wave of investigations is targeting executive greed, insider trading and investment pools known as hedge funds. On Tuesday, the former finance chief of Comverse Technology Inc. pleaded guilty to covering up a scheme to trigger big paydays for employees by changing the grant dates on stock options. Meanwhile, federal prosecutors charged the former finance chief of Refco Inc. for his role in a $1 billion accounting scandal that hurled the commodities brokerage into bankruptcy proceedings.
"There is an awful lot to do in the world of corporate fraud," said Chip Burrus, assistant director in the FBI's criminal investigation division.
Policing corporate malfeasance after Enron, it seems, won't be slow -- only different. The task-force model, criticized by defense lawyers for its single-minded pursuit of Enron's top officials, is unlikely to be repeated anytime soon. But the governance changes wrought by the company's collapse mean that more chief executives are losing their jobs because of allegations of wrongdoing and that more businesses are paying for costly internal investigations to ferret out fraud on their own.
Over its life span, the Enron Task Force secured guilty pleas from more than 15 executives, including the leaders of three top Enron business units, its finance chief and its chief accounting officer. Their testimony helped win convictions in May against Skilling and company founder Kenneth L. Lay, who died weeks later, of leading an accounting fraud that cost investors and employees billions of dollars.
However, the group's record in trials against lower-level executives has been mixed, legal analysts said.
Last week, the U.S. Court of Appeals for the 5th Circuit rejected a task-force request to re-hear its appeal in a case against former Merrill Lynch & Co. officials convicted of engaging in a sham deal to help Enron meet earnings targets in late 1999. A three-judge panel last summer threw out the conspiracy charges against the Merrill bankers, ruling that they did not deprive the investment bank of their honest services. The government still has the option of asking the Supreme Court to consider the case. The Justice Department's fraud section will pick up any remaining cases from now on, officials said.
Separately, the prosecution of executives in Enron's highly touted Internet broadband unit produced mixed results. A jury acquitted one defendant, former accountant Michael Krautz, and failed to come to a unanimous decision against several others.
Washington defense lawyer Barry Pollack, who won an acquittal in a jury trial for Krautz this year, criticized the task force for using aggressive legal theories and said the group has "precious few convictions after trial to show for its efforts."
"The task force will likely be remembered only for its success in obtaining convictions of Mr. Lay and Mr. Skilling, but its overall record in other cases of not-guilty verdicts and reversals by appeals courts is equally part of its legacy," Pollack said.
Task-force leaders also declined to retry defunct accounting firm Arthur Andersen LLP in its obstruction-of-justice case after the Supreme Court, in a serious setback, unanimously tossed its conviction in 2005. The firm's conviction four years ago nonetheless sounded alarms across the corporate landscape and spurred accountants to become more skeptical of their clients, leading to more rigorous audits and a greater number of restated financial results.
Enron became "the leading symbol of corporate scandal," in the words of U.S. Deputy Attorney General Paul J. McNulty, but the shuttering of the task force will by no means mark the end of regulators' pursuit of business crime, government officials said.
The FBI's Burrus added that while Enron amounted to "an amazing criminal phenomenon," the bureau still has more than 400 open investigations in such areas as stock options backdating, political corruption and related offenses.
Already, federal prosecutors have filed criminal charges against former executives at Comverse and Brocade Communications Systems Inc. for allegedly failing to disclose schemes that triggered bigger payouts for certain employees awarded stock options, which allow workers to buy stock at a set price and a specific time.
At least 30 executives this year have lost their jobs over options scandals, as board members now appear far more willing to fire top executives for questions about the propriety of their behavior, in part because corporate accountability legislation passed after the big-name frauds clarified directors' responsibility to investors.
But some legacies of the recent scandals may be more short-lived. In early 2002, President Bush created a government-wide panel to combat business fraud, a move that spurred federal prosecutors across the country to pour resources into such investigations. But after Richard M. Scrushy, the founder of HealthSouth Corp., was acquitted by an Alabama jury in 2004 and a criminal case against former Kmart Corp. executives in Michigan was dismissed, the difficulties of bringing and winning such cases became more clear.
As a result, there may be a natural devolution as complex fraud cases congregate once again in such hot spots as New York, San Francisco, Los Angeles and Chicago, said Leslie R. Caldwell, a former federal prosecutor and the first leader of the Enron Task Force.
Moreover, business groups already are pushing back on the regulatory crackdown, attacking accounting strictures in the 2002 Sarbanes-Oxley federal law as too expensive and pushing lawmakers and securities regulators to weaken the rules. Two independent committees, including one led by the U.S. Chamber of Commerce, are studying ways to change the law. Treasury Secretary Henry M. Paulson Jr. has made statements criticizing the rules, as well.
Timothy J. Coleman, a former prosecutor and Justice Department official, predicted that the legions of investigators hired by securities regulators, federal prosecutors and the FBI will pay lasting dividends because they will become a "standing army" ready to target business wrongdoing.
"Whether it's stock options, mutual funds or something else, corporate America should expect a continuing series of major, nationwide investigations for the foreseeable future," said Coleman, now a defense lawyer in Washington.