U.S. Attorney Patrick Meehan hasn't yet caught any companies engaging in the fraudulent accounting tactics that Enron used to boost revenues. But should one turn up in the Philadelphia jurisdiction where Meehan represents the Department of Justice, well, he wouldn't be sorry.
"I'm not wishing that there be some major corporate scandal with Eastern Pennsylvania nexus," says Meehan, an antiterrorism expert and member of the DoJ's newly formed Corporate Fraud Task Force. "That doesn't mean we aren't very aggressively scrutinizing activity in our area."
To that end, Meehan has been changing the way he does business. For one thing, he's getting weekly, rather than ad hoc, updates on suspicious corporate activity from his white-collar-crime expert. More important, he's teaming with other agencies, such as the Internal Revenue Service and the U.S. Postal Service, to pursue corporate cases that have potential criminal implications. Already, he and Arthur S. Gabinet, the Philadelphia-area head of the Securities and Exchange Commission, have planned staff cross-trainings and reviewed cases of mutual interest.
Meehan is hardly alone in tightening his scrutiny. While the 93 Presidentially appointed U.S. Attorneys who represent the DoJ nationwide have broad discretion in choosing cases, it's hard for them to ignore the fact that their bosses have put revenue inflation and expense miscapitalization on a par with terrorism and drug pushing. "When financial transactions are fraudulent and balance sheets are falsified, the invisible hand that guides our markets is replaced by a greased palm," said Attorney General John Ashcroft as he pressed charges against WorldCom executives last August. "Corporate executives who cheat investors, steal savings, and squander pensions will meet the judgment they fear and the punishment they deserve."
Beyond the rhetoric, the federal government has taken unprecedented measures to strengthen its corporate fraud-fighting resources. Before last summer, there was no "home" for such cases within the DoJ, which relied on its various subdivisions, including the FBI, securities-fraud and white-collar-crime units, and local U.S. Attorneys, to handle them on an as-needed basis. Now the inter-agency Corporate Fraud Task Force, formed last July, is coordinating investigations into alleged misconduct at such major firms as Adelphia Communications Corp. and Qwest Communications International Inc., and equipping local staffs with the resources and expertise they need to hasten indictments. President Bush's proposed budget, meanwhile, offers $24.5 million to the cause, some of which will be used to hire 88 new staff members in the U.S. Attorneys' offices and 118 new workers at the FBI.
Add to these moves the public outrage at Enron and WorldCom officials, and no wonder prosecutors like Meehan feel compelled to jump on business-fraud cases. "Until now, most [U.S. Attorneys'] offices outside the major metropolitan centers haven't had the resources or experience to take these cases on," says John Falvey, a former assistant U.S. Attorney and now a white-collar defense attorney in Boston. "Thanks to the political climate, though, every office is now looking to make them."
That means that executives — particularly finance executives — have become targets for prosecutors looking for a win with superiors. "Many of the [accounting] cases I'm involved in, and my colleagues say the same thing, would not have been the subject of criminal investigations a few years ago," says Jan L. Handzlik, a partner at Kirkland & Ellis. Adds Thomas E. Dwyer Jr., a white-collar defense attorney at Dwyer & Collora in Boston, "Every office is looking for its own Enron."
More Than Tough Talk
Of course, the DoJ has long talked tough about corporate fraud, and has brought action against executives at companies that created massive investor losses, such as Cendant and McKesson. Yet, while prosecutors have had the legal authority to bring criminal fraud charges since the 1930s, the agency has historically stuck to crimes that yield more tangible evidence, such as murder, kidnapping, or illegal arms possession.
"[Accounting] cases are not easy to prosecute, since they have to prove that an executive knew or should have known about the fraud in order to indict," says John K. Markey, a partner with Mintz Levin Cohn Ferris Glovsky and Popeo PC and a former assistant U.S. Attorney. That's a higher burden of proof than SEC investigators typically require for civil cases, which are contingent on proving only that a filing contained incorrect information. Given the volume of resources required for the DoJ to build such cases, most prosecutors have found it worthwhile to take on corporations in only the most egregious or clear-cut instances.
Thanks to recent legislative changes, however, lawyers see a future in which many common accounting snafus, including restatements, could put executives at risk for jail time. "With the new Sarbanes-Oxley requirement to have strong internal controls and officer certification of financial statements, the bar has been lowered on the 'knew or should have known' standard," says Markey. "The presumption will be that the CFO must have known if something has gone wrong."
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