Sometimes, however, the client's involvement is all too clear. "In some cases, you're doing damage control," says Janis. "Before I began representing [WorldCom's Myers], he had basically acknowledged the accounting fraud to the internal investigators, the external auditors, and the board." Like Buford Yates, Myers pleaded guilty and received a jail sentence of a year and a day. "No lawyer likes to have a client go to prison," comments Janis. "But given the fact that he was in the middle of the fraudulent activity and that he had acknowledged it, it could have been a lot worse."
In such situations, cooperating with prosecutors may be the best strategy for finance executives. In the WorldCom case, for example, former finance chief Scott Sullivan pleaded guilty to securities fraud after arguing his innocence for two years. His cooperation enabled the government to indict Ebbers, and he became the government's star witness against his former boss. Sullivan, who estimated he spent some 400 hours working with prosecutors, likely received a double-digit reduction in his sentence due to his helpful and extensive testimony, says Stone (who was not involved in the case), despite the fact that Judge Barbara Jones called him the "architect" of the WorldCom fraud.
Similarly, the five former HealthSouth CFOs who pleaded guilty and testified against former CEO Richard Scrushy received relatively light sentences in part because of their cooperation, although Scrushy eventually won an acquittal. Meanwhile, Richard Causey, the former Enron chief accountant who recently pleaded guilty to a single count of securities fraud less than a month before his trial was scheduled to begin, now faces up to seven years in prison, with a possibility for a reduction to five years if the prosecutors determine that he has acted in good faith. For a defendant who had faced 36 counts of conspiracy, fraud, insider trading, lying to auditors, and money laundering, the deal looks quite a bit less risky than going to trial in Houston, Enron's hometown.
Ultimately, most cases turn on the definition of fraud. If a defense attorney cannot avoid charges and cannot argue that his client was not involved in the alleged improprieties, he turns to the gray area: Did my client know that what he was doing was wrong?
"Accounting is not a black-and-white science," says Schertler. "If you're embezzling money, you know it's a crime. If you're dealing drugs, you know it's a crime. But what we've always focused on in accounting fraud is: Is this really a crime?" Adds Keker: "You want to show that matters of judgment are not matters of criminality. What's happened in the last few years is that people have used hindsight to label as criminal things that at the time were considered cutting-edge."
For example, in the 2004 "Nigerian barge" trial — regarding a 1999 agreement by Merrill Lynch to buy Enron's stake in three power-generating barges on the condition that Enron would buy them back at a price that would mean a profit for Merrill Lynch — Keker, who was not directly involved in the case, says executives at both companies had extensive discussions about whether the transaction was legal, decided it was, and proceeded. At trial, the court decided otherwise, and prison sentences for four former Merrill Lynch bankers and a former Enron vice president followed.
When Things Go Wrong
Of course, even the best lawyers occasionally come up short in the courtroom. Strategies backfire, facts prove flimsy, outside influences play a decisive role. Weingarten says he is still "grieving" the outcome of the Ebbers trial, which he tried unsuccessfully to have moved to Mississippi, a location he believes would have been more sympathetic than the New York stage on which Tyco CEO Dennis Kozlowski and CFO Swartz were also convicted. A hometown location (Birmingham, Alabama) provided a tremendous advantage to Richard Scrushy, points out Weingarten. He had also hoped for success with a jury that was not Wall Street savvy, having won an acquittal for former Tyco general counsel Mark Belnick with a similar jury. "This one didn't work out so well," says Weingarten.
Countering government charges that Swartz had looted Tyco for his own gain, attorney Stillman argued that his client did not intend to cover up the millions of dollars in bonuses he received — and that since there was no criminal intent, there was no fraud. Stillman says Tyco's board of directors knew of and sanctioned the sums. "There was no indication to Swartz that anything was crooked. You have directors who, when something bad happens, all of a sudden have very bad memories," says Stillman. But the jury rejected the argument. The verdict is under appeal.
In the case of former Adelphia finance chief Timothy Rigas, Grand tried to make the case that his client did not know about any wrongdoing at the cable operator. He maintained that the CFO's expanded role at the company following the cancer diagnosis of his father, CEO John Rigas, prevented him from closely monitoring the transactions that were at issue. But again, the jury rejected the argument.
Ebbers, Rigas, and Swartz all received lengthy prison sentences — 25 years, 20 years, and 81/3 to 25 years, respectively. (All have appealed their convictions.) With criminal prosecution now a common feature of financial investigations, attorneys recognize that the stakes have changed. "If the worst that's going to happen is the guy gets 2 to 3 years in jail, that's tough — it's tough on his family and it's a disgrace," says Keker. "But now, it could be life. It's a lot of pressure."
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