Jailhouse Shock

Cosmo Corigliano will likely wake up behind bars this month as a result of his role in inflating the earnings of CUC International Inc.--misstatements that came to light after CUC merged with HFS Inc. in 1997 to form Cendant Corp. The 40-year-old former CFO pleaded guilty to two counts of fraud in June. Corigliano, who appears to be cooperating with the government in its pursuit of his former boss, Walter Forbes, faces as much as a 10-year sentence without parole. And two of Corigliano's former colleagues, Anne Pember, CUC's controller, and Casper Sabatino, the CUC accountant in charge of external reporting, each pleaded guilty to one count of fraud and face 5-year sentences. All three will find out their fate this month.

What's striking about the CUC fraud is not just that a former CFO will probably wind up behind bars, but that it was the Securities and Exchange Commission that called in criminal prosecutors--as the agency did in January 1999 in another case, involving Canadian theatrical producer Livent Inc. Livent's former CFO, Maria Messina, is awaiting sentencing after pleading guilty to one count of filing fraudulent financial statements. According to the U.S. Attorney's Office, she could receive five years in prison.

The SEC, it seems, is fed up with screaming headlines and crashing market caps caused by earnings management that crosses over what chairman Arthur Levitt calls "the gray area between legitimacy and outright fraud." In a speech last December to the American Institute of Certified Public Accountants, Richard Walker, director of the SEC's Division of Enforcement, warned, "We are moving toward turning the 'numbers game' into a game of Monopoly--that is, you cook the books and you will go directly to jail without passing Go."

That, say officials, means the SEC is referring more of its cases to the U.S. Attorney's Office for criminal prosecution. "The amount of criminal referrals is up in general and certainly up with regards to financial fraud and Internet fraud," says David M. Levine, senior adviser to the director of enforcement at the SEC. "These are our two top priorities now." Indeed, last May the SEC created a financial fraud task force, composed of 10 attorneys and three accountants.

Citing pressure to make numbers and keep analysts and shareholders happy is no defense against individual criminal prosecution, warns Levine. "We are not a fan of the 'good soldier' defense," he says. "Behind every fraud we believe there are one or more persons calling the shots, and we try to ascribe individual liability." As proof, he notes that in 94 financial fraud cases brought last year by the SEC, only 3 did not name individuals.

Most of those cases were not referred for criminal prosecution, but the U.S. Attorney's Office seems eager to tackle any cases the SEC sends its way. "Financial fraud cases are being warmly received by criminal prosecutors," claims Levine.

The Giuliani Factor
That wasn't always the case, according to Philip Feigin, who recently joined the Denver law firm of Rothgerber Johnson & Lyons LLP after 20 years as a state securities regulator in Colorado and Wisconsin. "In 1979­80, the mood among my colleagues was that you simply could not get a prosecutor to take a white- collar case at the federal or state level," says Feigin. "They were too complicated, they took too long, and judges never sentenced white-collar crooks to jail even if you convicted them."

Times change. According to a study last fall in the ABA Journal, about one of every two convicted white-collar criminals was put behind bars between 1993 and 1997. Feigin credits former U.S. Attorney Rudolph Giuliani, who launched a political career in the wake of his prosecution of Michael Milken, for proving that white-collar crime does pay--for federal prosecutors with political ambitions.

But while prosecutors are now willing--even eager--to pursue white-collar crimes, it's not clear yet whether there is any bite behind the SEC's bark. Statistics on SEC referrals to the U.S. Attorney's Office are available only through 1998, the same year that Levitt announced the agency's new focus on reporting fraud during a speech at New York University. That data shows the number of criminal referrals actually falling from 1992 to 1998, from 23 cases to 9. However, the same data shows average prison sentences resulting from SEC referrals growing longer, from 10 months in 1992 to 49 months in 1998. There are too few sentences to draw statistically significant conclusions, but the numbers seem to support Levine's contention that frauds are growing in size, involving larger companies.

"Historically, many of the cases that we brought involved smaller issuers like ZZZZ Best," notes Levine, referring to the carpet-cleaning company that defrauded investors in the 1980s. "But now you see the Cendants of the world. You are starting to see larger issuers involved in these cases."

That doesn't mean smaller issuers are slipping through the net. Consider the case of Patrick R. Bennett, former CFO of Bennett Funding Group, who fleeced more than 10,000 investors of at least $600 million in what law enforcement officials say was the largest pyramid scheme in U.S. history. Bennett was sentenced in June to 30 years in prison.

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