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Enron untouched in fight against corporate fraud

Posted By Barry Ritholtz On August 4, 2003 @ 11:34 pm In Finance,Media | Comments Disabled

Kudos to The Financial Times for a story which seems to have been mostly forgotten by much of the American media . . .

Enron untouched in fight against corporate fraud [1] (FT subscription required)
by Joshua Chaffin in Washington | The Financial Times
Published: August 1 2003 19:31 | Last Updated: August 1 2003 19:31

The Justice Department has proudly boasted of the hundreds of executives its Corporate Fraud Task Force has rounded up since its launch more than a year ago to fight white-collar crime. But the failure to bring charges against top executives at Enron, the signature case of the era, has loomed at least as large as prosecutors’ many successes. Despite months of investigation and generous resources, a separate task force has failed to touch either Ken Lay, the former chairman, or Jeff Skilling, the former chief executive.

I find this hard to believe that astraight up task force is unable to “touch” Lay or Skilling. Given the extent of the fraud at Enron, its impossible that Lay did not know and have an active hand in the lies, deceipt, and trickery. The entire firm was an enormous house of cards built upon a foundation of fraud. Its dumfounding. At the very least, the captain of the ship is responsible for what happens on his watch.

That has undermined efforts to restore faith in the justice system. It is all the more sensitive to the Bush administration because of the ties between the president and Mr Lay, who was a main benefactor, before the scandal erupted.

The two executives have denied any wrongdoing, and the lack of charges against them may demonstrate admirable restraint by prosecutors in the face public pressure. But legal experts say it may also highlight the challenges of trying to reach the top rungs of the corporate ladder in fraud cases.

Enron is far from the only case where arrests of lower level employees have yet to yield indictments against chief executives. Bernie Ebbers, the former head of WorldCom, and Joseph Nacchio, the former head of Qwest, are both walking free.

“The lesson of these cases is that it’s very difficult to prove that a CEO of a large company was involved in the accounting fraud,” says Howard Schiffman, a partner at Dickstein, Shapiro, Morin & Oshinsky, a Washington law firm. For one thing, the complexity of off-balance sheet partnerships and other instruments of financial engineering are difficult to convey to a jury.

Its difficult to prove fraud in small or obscure cases. These were monumental frauds, involving literally tens of billions of dollars. How hard can that be to prove?

Mr Schiffman says that Dennis Kozlowski, former head of industrial conglomerate Tyco, was indicted first on tax issues related to his art collection, which had nothing to do with its underlying accounting problems. Another problem for prosecutors is that chief executives are generally removed from day-to-day bookkeeping. This makes it easy for them to deny that lower level executives were acting on their direct orders when they cooked the books.

That may be the case in the Enron investigation. The Justice Department got off to a swift start, securing a guilty plea last August from Michael Kopper, a senior finance executive who helped devise many of the company’s off-balance sheet partnerships. Mr Kopper’s co-operation then helped the government win an indictment against Andrew Fastow, his former boss who was then chief financial officer, in October. But the track appears to have gone cold. Mr Fastow has pleaded innocent, and efforts to turn him against Mr Skilling or Mr Lay have fizzled out.

How can someone who ran a company for nearly a decade claim no knowledge or understanding of its structure or financial engineering? It strains credulity to think that these former Enron Execs can use Gee, I missed that one . . . Sorry, wasn’t paying attention” defense.

The government cannot be faulted for lack of effort. Not only was Mr Fastow re-indicted in May, adding scores of new charges, but his wife Lea was also arrested on tax charges that some lawyers believed were a stretch. A separate investigation into whether Mr Lay violated insider trading rules when he sold Enron stock also appears to have come up empty. A review of his accounts determined that those sales were often made to meet margin calls from his broker.

“I think the Department of Justice – even though they won’t admit it – must be terribly disappointed with the results,” says Jacob Frenkel, a Washington lawyer. “At this point, there are only two explanations: lack of evidence, or having a team that’s in over their heads.”

A legal team of public attorneys overmatched by corporate defense counsel? Now that actually makes makes some sense.

The Justice Department declined to comment on the investigation. Some former prosecutors speculate that Mr Fastow may be holding out because, even with a deal from prosecutors, he would still face considerable jail time if he were to plead guilty. His tenure at Enron has given him the resources to retain a top defence team and take his chances at trial. Another theory is that Mr Fastow simply does not have any strong evidence against those higher up to help the prosecution. Even if he did, his credibility as a witness would be called into question because of his own indictment and his obvious motive to point the finger at Mr Lay or Mr Skilling.

As the months drag on, the lack of arrests has fed public cynicism that the wealthiest and best-connected executives are not subject to the same justice as everyone else. Several columnists have argued that the arrest in June of Martha Stewart, the well-known home design icon, was a ploy to distact attention from the government’s failings at Enron and WorldCom. One prosecutor suggested the government could turn this public anger to its favour by indicting Mr Lay, Mr Skilling and Mr Ebbers – regardless of the evidence – and forcing them to stand trial in the current lynch mob atmosphere.

“There’s no jury in America who understood what Michael Milken did,” he says, refering to the junk bond king who pleaded guilty amid a wave of financial scandals that enraged the public over a decade ago. “It didn’t matter.”

That is the crux of the matter: Can a prosecutor(fairly) obtain a conviction in a court of law using rules of evidence?

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