Risk & Compliance

Book ‘Em

Courts are handing down harsh penalties to CFOs that break the law.
Tim ReasonAugust 23, 2000

Is there a CFO crime spree under way? Several CFOs made big news this summer not for making their numbers, but for getting them.

In July, CFO magazine reported that former CFO Patrick Bennett received a 30-year jail sentence for bilking thousands of investors. His firm, Bennett Funding Group, in Syracuse, New York, sold securities based on phony office-equipment leases. (Click here to read the article.) That same month, Paul Polishan, former CFO of The Leslie Fay Cos., was convicted on 18 of 21 charges related to accounting misstatements that sent the company into bankruptcy 7 years ago. He faces a statutory maximum of 115 years in prison when he is sentenced in October; experts say he will receive at least 10 to 15 years.

Allegations of crimes by CFOs hit an all-time low, however, on August 10, when the Wall Street Journal reported that Stuart Winkler—a CFO already awaiting trial for his alleged role in a securities fraud—was indicted on charges that he hired a hit man as part of an unsuccessful attempt to kill the New York judge presiding over his case. Winkler was CFO of A.S. Goldmen & Co., a small brokerage firm dealing primarily in microcap stocks that was indicted, along with 34 of its employees, for securities fraud in July 1999. The CFO was reportedly unhappy with the bail set by the judge, and felt a different judge would be more lenient.

It’s unusual, to say the least, for a CFO to face attempted murder charges, but it’s increasingly common for CFOs to face serious prison time for less-spectacular offenses. Anyone crossing the legal line to boost stock prices will face aggressive prosecution and long prison sentences, says David M. Barasch, U.S. Attorney for the Middle District of Pennsylvania, who oversaw the Polishan case. “There’s a reason why these things are crimes,” he says. “Our free market and capitalist system can function only if individual investors have assurance that the numbers in publicly traded companies have meaning.”

That’s bad news for the likes of Polishan, the 24-year employee of clothing maker Leslie Fay. In contrast with Bennett’s pyramid scheme or Winkler’s alleged boiler-room practices, Polishan is facing time for accounting fraud. Although his compensation was linked to company performance, there was no suggestion at his trial that he embezzled funds or stole directly from the company. The message of the Polishan verdict, says Barasch, is clear: “If you think that white-collar crime actually pays, think again.” Leslie Fay went bankrupt in 1993 when the misstatements of Polishan and one of his lieutenants came to light. The company did not reemerge until June 1997.

The Securities and Exchange Commission insists that accounting fraud is an alarming trend, and it has stepped up its criminal referrals in such cases. “It is a feature of the changing dynamic of our markets,” says David M. Levine, senior adviser to the SEC’s director of enforcement. “Nowadays, if you miss the analyst forecast by a penny, you are done and your stock gets hammered.” And although Levine is a fan of incentive compensation, he also notes that it increases the temptation to “see that the stock price is just about as high as it can be,” even if it takes illegal means to get it there.

(For more coverage of the SEC and Justice Department crackdown on accounting fraud, see “Jailhouse Shock” in the upcoming September issue of CFO).

Tim Reason is a staff writer at CFO.