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Experts claim the pendulum is swinging away from aggressive enforcement of corporate fraud. Will Monday's sentencing of the former Enron CEO prove them right?
Sarah Johnson, CFO.com | US
October 20, 2006
Nearly five years have passed since Enron's shocking and spectacular demise from the seventh largest company in the United States to a bankrupt, hollow shell of an organization. At the time, amid financial fraud fallouts at WorldCom, Tyco, and Adelphia, there was talk of long prison terms for those responsible, including those who worked at the very top.
The fates of two the top three Enron leaders, the late ex-chairman and chief executive officer Kenneth Lay and the ex-CFO Andrew Fastow, have, of course, been already determined. Much to the likely disappointment of government regulators, however, the one left standing—former Enron CEO Jeffrey Skilling—is probably not going to be singled out for unusual punishment, according to legal experts who spoke with CFO.com. The sentencing U.S. District Judge Simeon T. Lake III metes out to Skilling on Monday will probably be in the 20-year range, they say, which is pretty much in line with the sentences of WorldCom's former WorldCom CEO Bernard Ebbers (25 years) and Adelphia founder John Rigas (15 years).
Lake, however, is tasked with making a decision on Skilling's individual actions, his 19 counts of fraud, conspiracy, and insider trading, and not necessarily sending a broader message about corporate fraud in general, according to Marc Powers, who heads Baker Hostetler's national securities litigation and regulatory enforcement practice.
"I think that there is a slight swing back of the pendulum of overly aggressive enforcement efforts of the government, on behalf of the Justice Department and the Securities and Exchange Commission, and that is in some measure attributed to the actions by defense lawyers, the bar association, and other types of interest groups as well as the jurors themselves," he says. "I think that if you look at the well-intentioned actions by the government in seeking to stamp out what was perceived as major scandalous fraud matters—perhaps encouraged by the lack of diligent earlier enforcement—you could understand why the government came down as much as it did."
Russell Ryan, a partner at King & Spalding who spent a decade in SEC enforcement, agrees that the pendulum has slightly turned. "One of the reasons is that in the last four years or so, since the Enron case first broke, corporate execs have gotten the message and substantially improved their corporate governance," he says.
Prosecutors have faced poor press in the past year as guilty pleas like Fastow's have given way to what many view as lenient sentences in high-profile cases. In addition, earlier this year, a federal judge rebuked the government for pressuring KPMG to cut off legal services to 16 employees, including a former CFO, accused of setting up tax shelters as part of their work for the firm. That has brought up questions about the validity of the so-called Thompson memo, which outlines nine factors for prosecutors to use while deciding whether to indict a company.
Government officials have promised to "combat corruption wherever we find it," as U.S. Deputy Attorney General Paul J. McNulty has said. His Corporate Fraud Task Force has won convictions against more than 200 executives, including 30 CFOs, in the past four years. (See CFO magazine's interview with McNulty.)
As a result of some cases not going in their favor, government enforcers are modifying their tactics to conform with judges' decisions, Ryan says. "I don't view it as them being less aggressive. I think they're more careful about the way they go about things."
Any message sent to would-be corporate fraud wrongdoers was taken care of with Ebbers' sentencing, says Peter Henning, a law professor at Wayne State University. Whatever prison term Skilling receives, "people are going to remember Lay and Skilling, and they will remember Bernie Ebbers," Henning says. "They've become the poster children for corporate fraud. Ten years down the road, Ebbers and Skilling will be [considered] a successful pushback against corporate crime."
If Lake's treatment of another energy company executive involved in corporate scandal is an indication, he will consider Skilling's fate without thinking about what his colleagues were sentenced, according to Wayne State University law professor Peter Henning. In 2004, Lake sentenced former Dynegy Inc. tax executive Jamie Olis to 24 years in prison, a sentence that was later reduced to six by a federal appeals court. Olis and two former associates were found guilty of disguising a $300 million loan to the company as cash flow.
Likewise, Lake will probably not punish Skilling for Lay never having to spend a day in prison. "The case involved Skilling more than Lay," Henning says. "Skilling was more of a hands-on manager, considering his position and managerial approach. I don't think Lay's [actions] will have a bearing on Skilling's sentence."
On Tuesday, Lake vacated Lay's conviction of 10 criminal counts. As CFO.com found out on July 5, the day Lay died of a heart attack, his death wiped both his conviction and indictment from the record because he had not been able to exhaust his efforts to appeal, based on a legal principle known as the abatement doctrine.
Government attorneys indicated last August that they intended to fight efforts by Lay's attorneys to clear his conviction, which now will complicate efforts by the Securities and Exchange Commission to take disgorgement action against Lay's estate. Civil suits against Lay will be similarly hampered.
Last month, Fastow received a six-year sentence, which was much less than expected after he had agreed to serve 10 years under a plea bargain. Other former Enron executives await their sentencing, notably chief accounting officer Richard Causey, whose sentencing is scheduled for mid-November.
Skilling, however, is the most prominent Enron exec left to find out his punishment. He originally faced 28 counts of fraud, conspiracy, insider trading and lying to auditors, as well as a maximum of 275 years in prison if convicted on all counts, according to the Associated Press. Outside the courtroom the day he was convicted on 19 counts, he told the press, "Obviously, I'm disappointed. But that's the way the system works."
Ryan predicts a ballpark of 12 to 15 years for Skilling's sentence, and believes that 20 years would be too harsh. "Twenty years for a person like Skilling in my view is not going to make people less worried about the consequence for corporate fraud," he says. "Most CEOs can't imagine prison for any length of time, even 10 years. The threat of any criminal prosecution and any jail sentence is enough to deter to almost anyone."
Skilling is unlikely to be taken away in handcuffs on Monday. Legal observers predict that Lake will let him loose on bail, pending his appeal. Skilling has asked Lake to throw out his conviction, based on an appeal in an Enron-related case. The jury might have believed he did not provide the company with "honest services," which is theory that influenced a New Orleans court to overturn four convictions, according to The New York Times. The appeal process could give him another year of freedom, legal observers predict.
Skilling's falsehoods to his employees, shareholders, and the public caused "tremendous harm to the entire Houston community," Powers says. "For the employees of Enron, it devastated life savings, shattered many of their dreams and their employer prospects for many years to come. And it brought down Arthur Andersen, one of the top accounting firms in our nation."
On Monday, Lake may also make a decision regarding how much money Skilling owes. In June, prosecutors had asked him to order Skilling to pay $139.3 million, and his co-defendant, Ken Lay, to pay $43.5 million as restitution for their convictions on fraud and conspiracy charges. After Lay died, prosecutors indicated that Skilling is "liable for all the proceeds attributable to all co-conspirators, indicted or unindicted, including Lay," because they participated in the same scheme, the AP reported at the time.