VideoLast year, former McKesson Corp. CFO Richard Hawkins faced criminal charges after a $20 million accounting error was discovered at HBO & Co., a subsidiary McKesson had acquired in 1999. Together, the charges, including securities fraud and conspiracy, carried a maximum sentence of 25 years in prison. With executives from Tyco, WorldCom, and HealthSouth also on trial, and with public outrage at corporate scandals mounting, Hawkins decided to take a gamble: he waived his right to a jury trial.
"We didn't have a lot of comfort that a jury would take the time to wade through the accounting rules — particularly in this climate, with so many other executives going to trial at the same time," explains Walter F. Brown Jr., a partner at Orrick, Herrington & Sutcliffe LLP in San Francisco and a co-leader of Hawkins's defense team. The gamble paid off. The defense convinced the judge that the former CFO had made accounting judgments in good faith, after consulting with outside auditors. Hawkins was found not guilty on all counts, one of the few recent victories for a CFO on trial.
The verdict solidified Brown's status as a member of a legal elite: the 50 or so white-collar defense attorneys who are regularly tapped to represent top executives of America's largest companies. They include such stars as John Keker of Keker & Van Nest LLP in San Francisco, attorney for former Enron CFO Andrew Fastow; Reid Weingarten of Steptoe & Johnson LLP in Washington, D.C., who defended former WorldCom CEO Bernard Ebbers and is currently representing former Enron chief accountant Richard Causey; and Charles Stillman of Stillman & Friedman PC in New York, who defended former Tyco finance chief Mark Swartz.
This cream of the white-collar defense bar has been busy the past few years, as regulators and prosecutors have stepped up their pursuit of corporate wrongdoers. Civil and criminal investigations have focused on aggressive financial and accounting tactics, making finance executives inevitable targets of litigation. Companies are quick to distance themselves from accused CFOs, who are often pressured to cooperate with prosecutors or face the possibility of stiff penalties and prison sentences.
In this high-pressure, high-stakes environment, a finance executive needs the best legal help he or she can find — and afford.
The Howling Mob
Many top white-collar defense attorneys got their start on the other side of the aisle, as prosecutors. Many know one another, personally or by reputation; some worked in the same U.S. Attorney's office. As a result, it's clubby at the top, with attorneys regularly referring business to one another when schedules fill up or conflicts arise.
Those schedules have been filling rapidly with finance-related cases as the government has cracked down on corporate crime. For instance, Brown says 25 to 35 percent of his work involves finance executives, as defendants in civil or criminal investigations. Weingarten of Steptoe & Johnson says about half of his practice is devoted to defending finance executives, compared with 10 to 20 percent prior to 2001.
The surge in finance-related cases, often involving many millions of dollars of shareholder value, has been accompanied by increased public interest — and anger. "We're living in this environment where it's like you're defending a nobleman in the French Revolution, and the guillotine is outside and the mob is howling," says Weingarten. Keker agrees: "Since Enron, there's been a huge amount of hatred directed at CEOs and CFOs."
Accounting maneuvers that were once praised in the financial press as earnings management are now attacked in the courtroom as fraud. "We're seeing cases of accounting improprieties that are being prosecuted criminally today that would not have been prosecuted that way 10 years ago," says David Schertler, a founding partner at Washington, D.C.-based Schertler & Onorato LLP. In 2002, Schertler defended WorldCom's former director of accounting, Buford Yates, against securities-fraud charges. Agreeing to cooperate with investigators, Yates pleaded guilty and received a prison sentence of one year and one day.
It could have been worse for Yates, as prosecutors are seeking tougher plea agreements and longer jail sentences for white-collar defendants. "Suddenly, all people want to do is put chief financial officers in prison," says Charles Stillman, who defended Tyco's Swartz against fraud and larceny charges. "That's the game du jour."
Cram Sessions
To have a shot at winning this game, defense attorneys have to digest complicated financial matters in a hurry. "Often these cases rise and fall on complex accounting issues and your ability to understand them," says Brown, who studied the fine points of revenue recognition and the accounting rules regarding reciprocal transfer, or rights of return, for the McKesson case. "There is no substitute for immersing yourself in the GAAP literature and mastering it." Brown has taken classes designed for lawyers who practice in finance-related areas, and says his firm has brought in representatives from the Big Four accounting firms to conduct seminars.
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