Prosecutors spent years building a case against Martin L. Grass, the former chief executive of Rite Aid Corp.
They secured testimony from insiders, including Grass's brother-in-law, about alleged attempts to cover up a billion-dollar scheme to cook Rite Aid's books. They talked to accountants who said they raised concerns about the company's financial health only to get brushed back by Grass. They even sent a former president of the drugstore chain to secretly tape Grass talking about his efforts to derail the investigation.
Finally, last June, three years after the investigation began, a federal grand jury indicted Grass on fraud and conspiracy charges. He pleaded not guilty and remains at his Virginia Beach home awaiting trial later this year.
Grass is one of only a few high-profile chief executives to be charged with a crime as part of the Justice Department's crackdown on white-collar crime. The long pursuit of Grass illustrates how difficult it can be to snare a top executive on criminal charges.
Scott D. Sullivan, the former chief financial officer of WorldCom Inc., is the highest-ranking officer to be charged with a crime in the spectacular financial blowup at the telecommunications company. His trial is scheduled to start in September in New York. Bernard J. Ebbers, WorldCom's co-founder and former chief executive, has not been charged. Neither have Enron Corp.'s Kenneth L. Lay and several other chief executives at companies caught in the throes of financial scandal.
The crucial difference in many cases is whether prosecutors have managed to persuade insiders to lead them through complex financial transactions and to talk about intimate conversations and documents that could link a chief executive to illegal conduct.
"You can have all the paper knowledge in the world, but for a jury, you really need to tie it up with a human face," said former California attorney general Daniel E. Lungren.
There is reason for prosecutors to proceed cautiously. Many chief executives are wealthy enough to hire top legal talent, and experts say company officials often have little incentive to cooperate, given the government's penchant for seeking stiff penalties. Several lawyers for executives whose conduct has been called into question, including Ebbers and Lay, insist that their clients did nothing wrong. The executives simply were unaware of plans by underlings to massage the books or siphon off money, the lawyers say.
The stock market boom of recent years turned CEOs into corporate superstars, their actions chronicled on 24-hour cable channels and their thoughts the subject of best-selling books. In the glare of such attention, many chief executives chose to become public ambassadors and chief dealmakers for their companies, leaving the nuts and bolts of running businesses to people lower on the chain of command.
Under federal law, prosecutors can argue that a chief executive should have known that fraud was occurring, and if he did not, he should be convicted for "willful blindness." An official familiar with several of the cases said, however, that the Justice Department wants to meet a higher standard of proof before taking them to juries.
"Laypeople say 'They had to know' or 'They must have known.' For prosecutors, it's 'Can I prove he knew beyond a reasonable doubt?' That requires proving the contents of someone's mind," the official said. "It's not lack of guts. We need facts."
Federal prosecutors have opened more than 130 investigations into alleged white-collar fraud since President Bush created a government-wide task force to root out business crimes last year, Justice Department spokesman Bryan Sierra said. Few chief executives have been caught in the snare. The Securities and Exchange Commission can impose civil penalties, including large fines, even when investigators decide not to prosecute executives.
In the case of WorldCom, sources said the search has been hampered by Ebbers's refusal to use e-mail, although some company officials did send information for him to his secretary, Deborah A. Blackwell. A July 31, 2000, message to Blackwell opens with the salutation "Bernie." Even so, defense lawyers could argue that damning information never made it from Blackwell's computer to Ebbers's eyes.
The government, therefore, would have to find people, if they exist, who could testify that they talked with Ebbers about questionable methods that resulted in improper accounting for as much as $9 billion in expenses.
Company officials told Congress that Sullivan briefed Ebbers on changes to its ledgers, Rep. W.J. "Billy" Tauzin (R-La.), chairman of the House Energy and Commerce Committee, has said. That would make Sullivan the logical person to testify against Ebbers. The company has said it doubts such accounts, and there is no public sign that Sullivan has the information prosecutors want, or, if he does, that he wants to share it. Sources familiar with the case said a stumbling block is that the Justice Department wants Sullivan to serve such a lengthy prison term that he may feel it is worth taking his chances with a jury.
Ebbers's attorney, Reid H. Weingarten, said Tauzin is mistaken and that prosecutors will never take his client's case to a grand jury. Former WorldCom associates said Ebbers detached himself from WorldCom's operations, preferring to focus his attention on the many acquisitions that made the company the giant it is. Ebbers was a master dealmaker, not someone who scoured accounting ledgers, they said.
"Prosecutors are careful. . . . They are not swayed by the howling mob. They are sifting through the evidence to determine if there is a case to be brought," Weingarten said. "In the case of Ebbers, there's no case to be brought. He is innocent."
Jeffrey A. Sonnenfeld, an associate dean of the Yale School of Management and head of the Chief Executive Leadership Institute, said CEOs are expected to be financially literate and savvy with numbers. He said some executives caught up in the current accounting scandals rose to prominence because of financial acumen they now disavow.
"It's quite unconvincing to hear the cries of Bernie Ebbers and Lay that they had delegated this responsibility elsewhere," he said.
Sonnenfeld said corporate executives may vary in how closely they monitor a company's financial dealings, but that most are well-versed in the numbers by the time they talk with analysts about their quarterly results. "They take these conference calls extremely seriously," he said. "They're up all night going through the numbers, looking at them every different way, trying to figure out which questions may be asked."
But E. Lawrence Barcella Jr., a former federal prosecutor who now defends corporate officers, argued that too many are being "painted with the same brush," while motives and knowledge of accounting problems may differ widely. Some executives enriched themselves by millions of dollars through well-timed stock sales, Barcella noted, while others did not take away any money other than their annual salaries and bonuses.
ImClone Systems Inc.'s Samuel D. Waksal, for instance, pleaded guilty to securities and bank fraud charges stemming from a larger investigation into the sale of the biotechnology firm's stock shortly before news became public that its key drug product had been rejected by regulators.
Prosecutors also appear to be concentrating on stock sales by Lay. The Justice Department's Enron task force has presented evidence to a grand jury about Lay's personal finances, including his use of a multimillion-dollar credit line provided by Enron and his repayment in the form of Enron stock, according to Michael Ramsey, Lay's lawyer. Lay maintained through Ramsey that the sales were appropriate. Witnesses, including former Enron board members, have appeared before the Houston grand jury recently to testify about Lay's frequent use of the credit line in the months before the company collapsed, according to people familiar with the investigation.
Meanwhile, efforts to connect Lay to broader securities-fraud allegations at Enron are moving slowly, in part because Lay mostly served as a grand ambassador rather than as a nuts-and-bolts administrator for most of his time at the Houston energy trader. When Enron ran into trouble during the California power crisis, Lay met with Gov. Gray Davis (D). After Enron's push to deliver movies over the Internet stalled, Lay brokered meetings with top entertainment executives.
Ramsey drove the point home in August, after Michael J. Kopper, a mid-level Enron finance official, pleaded guilty to fraud and conspiracy for bilking the company out of millions of dollars through secretive partnerships. Ramsey told spectators at the Houston federal courthouse that "Ken Lay couldn't have picked Michael Kopper out of a lineup. They're involved in different aspects of the running of Enron."
Sometimes prosecutors look to pin on executives less complex crimes, such as obstruction of justice or tax fraud, that can be easier to prove in court. That is how Manhattan District Attorney Robert M. Morgenthau proceeded in his investigation of former Tyco International Ltd. chief L. Dennis Kozlowski, who was indicted on tax-evasion charges last June. Prosecutors claim that he illegally avoided paying $1 million in sales tax on paintings he bought in New York by having them shipped to Tyco offices in Exeter, N.H., and then returned to New York.
"We are investigating the accounting, and that is a much more complicated question," said John Moscow, an assistant Manhattan district attorney.
Kozlowski and former Tyco chief financial officer Mark H. Swartz were charged in September with using $170 million in company money to throw lavish parties and buy expensive homes, jewelry and art for themselves, and with making $430 million more by selling stock at artificially inflated prices. An investigative report released earlier this month faulted Tyco's internal controls and described a culture in which internal memos mentioned the potential benefits of "financial engineering."
Even when prosecutors win an indictment, complex charges do not always stick. Prosecutors have had Rite Aid's Grass in their sights before.
Grass was charged with bribery by Cuyahoga County, Ohio, prosecutors in 1989. Grass denied the charges and predicted that he would be exonerated.
After two weeks of trial in which prosecutors submitted evidence about alleged payments from Rite Aid officials to influence the state pharmacy board, the case was dismissed by a judge who said the evidence was "circumstantial."
Grass went on to sue the government's chief witness against him. That defamation lawsuit was settled and Grass got a letter of apology.
SAMUEL D. WAKSAL
BERNARD J. EBBERS
KENNETH L. LAY
Former Tyco International chief executive L. Dennis Kozlowski leaves a New York courthouse last June after arraignment on tax-evasion charges.