In Enron's wake: corporate executives on trial.

• Author: Brickey, Kathleen F.
• Position: The Changing Face of White-Collar Crime

There may never have been a worse time to be a corporate criminal. (1)

I wish we had never heard of Bernie Ebbers. (2)

1. INTRODUCTION

   It was December, 2001--a few months after Enron CEO Ken Lay was warned of an "elaborate accounting hoax" (3) that had disguised fraud on a magnificent scale, and not long after Enron had publicly disclosed record fourth quarter shortfalls. Notwithstanding these dire financial straits, Enron executives behaved like pigs at the trough, doling out more than $100 million in bonuses to themselves and delivering the checks by plane on the eve of the largest corporate bankruptcy filing in United States history. (4) It soon became evident that Enron's collapse was only the first in a wave of accounting fraud scandals that would inflict huge financial losses and erode public confidence in the nation's financial markets.

   Fast forward to December, 2005. Ken Lay and two other top Enron executives, former President and CEO Jeff Skilling and Chief Accounting Officer Richard Causey, were then under indictment and only a month away from their criminal trial. (5) But here, the customary pretrial courtroom maneuvers were embellished by Lay's strategic effort to regain public relations momentum.

   Speaking before a group of 500 Houston business and academic leaders, Lay blamed Enron's downfall on a handful of bad apples (6) and--perhaps borrowing a leaf from Mark Twain's album (7)--claimed that most of what had been said about Enron's demise was either "grossly exaggerated" or just plain wrong. (8) Moreover, he charged, the Enron Task Force, which spearheads Enron-related investigations and prosecutions, had unleashed a "wave of terror" through the relentless pursuit of innocent businessmen, the bullying of witnesses, and a host of other prosecutorial excesses. (9)

   Following closely on the heels of Lay's highly charged speech, co-defendant Rick Causey rearranged the legal landscape for the trial by striking a deal with the prosecutors and agreeing to cooperate. (10) Former Enron Treasurer Andy Fastow, who was widely credited with engineering much of the Enron fraud, had already pied guilty and been cooperating for more than a year. (11) Causey's last minute defection, while not widely anticipated, was not without precedent. Surprise plea agreements reached on the eve of the Rite Aid trial, for example, left Rite Aid's Chief Legal Officer holding the bag. (12)

   It is axiomatic that most criminal cases are resolved through guilty pleas, and the recent corporate fraud prosecutions are no exception. And, like Fastow and Causey, most corporate executives who have pled guilty have also become cooperating witnesses, agreeing to help the government build criminal cases against their former colleagues and friends.

   I have written elsewhere about this building block technique and how it facilitates charging higher-ups like Skilling and Lay. (13) But this article turns to that rarer phenomenon of post-Enron prosecutions--cases that have actually gone to trial.

   We know relatively little about the corporate fraud trials because executives on trial have been relatively few and far between. It has taken roughly three years for these prosecutions to reach the trial stage and yield enough trial-related data to report and analyze. (14) Thus, until now, our knowledge about these trials has been largely anecdotal. But after a brief hiatus following Arthur Andersen's obstruction of justice conviction in 2002, (15) high profile executives began to find themselves in the dock--beginning with Adelphia CEO John Rigas (guilty), WorldCom CEO Bernie Ebbers (guilty), HealthSouth CEO Richard Scrushy (not guilty), (16) and Enron CEOs Jeff Skilling and Ken Lay (currently on trial).

   Now that we are deeply enough into the prosecution cycle that major cases have been tried, jury verdicts returned, and sentences imposed, this seems an opportune time to take a closer look at these prosecutions through the prism of newly compiled data on the trials. Although the number of cases is relatively small, the data set provides the most comprehensive picture of executives on trial available to date.

   Part II of this article addresses a range of questions about corporate fraud trials and verdicts. Which and how many cases have gone to trial, who has been tried, and what is a typical outcome? Does the government enjoy a high degree of success at trial, or are high-profile executives more likely to win juries over to their side? Part II addresses these and other core trial-related questions.

   Part III then turns to the flip side of the coin--cases that have ended in mistrials--and considers whether mistrials have been major government setbacks. How often have mistrials been declared? What factors come into play when a trial ends without a verdict? Were cases that ended in mistrials flawed from the outset? Are prosecutors' decisions about whether to retry a defendant a reliable gauge of the relative strength of the case? Are decisions to retry accompanied by discernable shifts in trial strategy? Part III provides a framework for taking a preliminary look at this intriguing set of issues.

2. CORPORATE FRAUD TRIALS AND VERDICTS

   1. TRIAL DATA

      The data set used in this article covers the period March 2002 through January 2006 and is derived from my ongoing study of major corporate fraud prosecutions. (17) Although the full data base is far more comprehensive, this article extrapolates data relating to fraud cases that had gone to trial as of January 31, 2006, (18) and tracks trials relating to scandals at seventeen major companies and firms (Table 1). As of the end of January 2006, forty-six defendants had gone to trial in twenty-three separate prosecutions.

      As a general rule, prosecutors typically charge multiple defendants in corporate fraud cases, (19) and this charging pattern is apparent in the cases that have gone to trial. More than two-thirds of the trials included in Table I had multiple defendants. Although four or more defendants were jointly tried in a handful of cases, (20) in most instances, no more than two defendants went to trial.

      Table 1 does not, however, convey the full scope of the government's charging practices because it does not include co-defendants who bargained with prosecutors and did not go to trial. When those who entered guilty pleas are added to the mix, prosecutors charged three or more defendants in a third of the cases they tried. And when we include co-defendants who pled guilty while their colleagues went to trial, the total number of individuals charged in these cases will increase to sixty.

      Guilty pleas are critical to the government's successful pursuit of corporate fraud cases in two important respects. First, they are numerically significant. In a baseline study of prosecutions completed between March 2002 and July 2004, for example, charges against eighty-seven defendants were resolved. (25) But while more than ninety percent of the outcomes were convictions, only about ten percent of the convictions were products of jury verdicts. Simply put, these cases were overwhelmingly resolved through guilty pleas (Table 2).

      Second, guilty pleas are strategically significant. Virtually all of the defendants who pied guilty during that two-year period became cooperating witnesses (27) who assisted the government in developing cases against their peers. (28)

      In the current study, while guilty pleas were less prevalent in the twenty-three cases that went to trial, one or more co-defendants entered guilty pleas in nearly a third of those cases. With only a few exceptions, (29) the defendants who pied guilty became cooperating witnesses.

      This does not, however, portray the full importance of cooperating witnesses in these trials. There are numerous separate but related cases in which defendants pied guilty and agreed to help prosecutors develop cases against, among others, defendants who ultimately went to trial (Table 4).

      Given the prevalence of guilty pleas and their pivotal role in these investigations, the question then becomes who actually goes to trial? Prosecutors have been chided for not aiming high enough and being content to charge mid-level managers whose guilt is easier to prove. But is it true that those in the middle are relegated to the role of scapegoat while the higher-ups enjoy a free pass? If the trial data are a reliable indicator, quite the opposite is true. Most of the defendants on trial have been high-level executives who held positions of responsibility and authority within their respective organizations. (32)

      Of the forty-six defendants who have gone to trial, twelve held the title of Chief Executive Officer, Chief Operating Officer, President, Chairman of the Board or, in the case of a partnership, Senior Partner. (41) Defendants on trial also included five Chief Financial Officers (42) and an assortment of other financial and accounting executives. (43) There were also seven Executive or Senior Vice presidents, five Investment Advisors, a Chief Legal Officer, and a Vice President for Legal Affairs. (44) Only one entity, Arthur Andersen, has gone to trial to date. (45)

   2. VERDICTS

      The trials tracked in this study have produced surprisingly mixed results. Juries have convicted eighteen defendants, acquitted eleven, and deadlocked on charges against fifteen others. Thus, at first blush, the government's trial record does not reflect overwhelming success and appears to validate--or at least provide support for--the criticism that prosecutors have overreached by trying to find crimes where none really exist. (46)

      Introduction of another variable--how juries function when defendants are jointly tried--may help to flesh out the picture and provide a baseline for assessing the strength of cases the government takes to trial. Do juries tend to accept or reject the government's case in its entirety when defendants are jointly tried? That is, do they tend to convict or acquit all of the defendants...