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Enron verdicts: A warning for corporate criminals
2006-05-25
The convictions of former Enron Corp. chief executives Ken Lay and Jeffrey Skilling on Thursday send a blunt message to corporate America -- lie to your shareholders and you will go to prison. The guilty verdicts, for lying about Enron's financial troubles to Wall Street, are the biggest win yet for federal prosecutors in their campaign to hold top executives to task for everything that happens in the executive suite. The trial was seen as a bellwether for future white-collar crime cases because of its size, complexity and the prominence of the defendants. A Houston jury found both Lay and Skilling guilty on multiple counts of fraud and conspiracy for their role in a scheme that caused the collapse of what was once the seventh-largest company in the United States. They now face spending a large part of the rest of their lives in prison. "This is a sign to any and all pending white-collar cases that corporate crime does not pay," said Anthony Sabino, a law professor at St. John's University in New York. "It is a huge memo to corporate officers and other chieftains. Stay within the law and don't cheat your shareholders and don't lie to the market or your next address is the federal penitentiary," he said. The energy company collapsed into bankruptcy in December 2001 amid disclosures that it used off-the-books deals to hide billions of dollars in debt and inflate profits. The bankruptcy -- the largest at the time -- wiped out billions in shareholder wealth as well as thousands of jobs. "The verdicts are highly significant because they represent the culmination of a series of efforts by the government to hold those responsible for fraud and other criminal activities," said Jonathan Halpern, a defense lawyer at Winston & Strawn and a former chief of the major crimes unit for the U.S. Attorney in Manhattan. MAKING A POINT Halpern added that the government expects the Enron convictions to serve as a deterrent for other corporate criminals. Prosecutors charged that Skilling, 52, and Lay, 64, knew of the financial trickery that was used to prop up the company's stock price. Throughout the trial, the men said they were unaware of the company's financial problems, a defense which clearly did not work in this trial and may never again. "This verdict invalidates that defense," Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said. "The jury in Houston did not believe that particular argument." Although claiming a CEO is unaware of fraud at a company may be a successful strategy in some white-collar cases, it did not work in Enron or other high-profile prosecutions including those of former WorldCom Inc. CEO Bernie Ebbers and former Tyco International Inc. (NYSE:TYC) CEO Dennis Kozlowski, Elson said. "This is what the federal government has been seeking," Claudia Allen, an lawyer in Neal, Gerber & Eisenberg LLP corporate governance group. "They have been meticulously moving up the ladder at these corporations, which signals to a lot of people that the era of the imperial CEO is over. Saying 'I don't know what happened' just doesn't work anymore." 'BIGGEST OF THEM ALL' The Enron verdict will also be a boost for federal prosecutors, who suffered a blow when they failed to win a conviction in the fraud trial of HealthSouth Corp. (Other OTC:HLSH) Richard Scrushy in June 2005. "The government's war on financial fraud had taken a substantial hit last year when Richard Scrushy was acquitted," Ross Albert, a partner at Morris, Manning & Martin who also worked as a lawyer at the U.S. Department of Justice. "But Enron confirms the Scrushy verdict was an outlier. And Enron was always the biggest case of them all." Scrushy is now on trial in Alabama, charged with bribing a former governor. And some say that the verdicts are significant simply because it signals the end of one of the worst financial scandals in the U.S. history. "Obviously, a guilty verdict really closes the chapter," the University of Delaware's Elson said. "It's an appropriate conclusion to an awful time." (Additional reporting by Jonathan Keehner)
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