From boardroom to courtroom to newsroom: the media and the corporate governance scandals.

• Author: Brickey, Kathleen F.

The first trial is always in the court of public opinion. (1)

1. INTRODUCTION II. JURIES, THE MEDIA, AND THE COURTS A. Mistrial by Media: The Tyco Trial B. Trial Without Media: The ImClone Trial C. Implications for the Future III. THE MEDIA AS PUBLIC RELATIONS MACHINES A. The Demon Card: The Andersen and Enron Trials B. The Race and Religion Card: The HealthSouth Trial IV. PRAISE OR BLAME? APPENDIX A: TRADITIONAL PRINT SOURCE COVERAGE APPENDIX B: THE CHANGING FACE OF MEDIA COVERAGE APPENDIX C: POSTSCRIPT ON PERMANENCY I. INTRODUCTION

   Enron and its progeny spawned an unprecedented amount of press coverage. To their credit, the media comprehensively covered allegations of widespread accounting fraud as serious and important news. Major newspapers deserve special credit for the breadth and depth of their coverage.

   While it was a safe assumption that the sagas of Enron and--to a lesser extent--media icon Martha Stewart would receive sustained media attention, the sheer magnitude of the corporate governance scandals fueled extraordinary coverage of massive frauds at WorldCom, (2) Tyco, (3) HealthSouth, (4) and Adelphia, (5) to name but a few. Before Enron collapsed into bankruptcy and became mired in a complex web of investigations, few would have predicted that the editors of the Wall Street Journal would devote significant resources--including prominent front page space--to criminal investigations and prosecutions over a prolonged period of time. But to the Journal's credit, it did.

   Apart from the value that intensive press coverage provided their general readership, major papers also helped inform public debate about how such massive frauds could have gone undetected as long as they did. For elected officials, business executives, legal and accounting professionals, academicians, and corporate governance activists, the burning question was: Where were the gatekeepers? What went wrong and how can we fix it? The remarkable thing is that, thanks to media saturation, almost everyone knew something about it.

   Yet despite all the spilled ink, the Enron fiasco came close to being one of the "biggest failures in financial journalism." (6) One of the most perplexing questions is why the financial press was asleep at the switch when Enron collapsed. Why was the news so late? How could the seventh largest company in the country melt down in a mere 24 days with so little forewarning? And how could the Houston Chronicle--whose headquarters were only a stone's throw from Enron's--come so close to missing the biggest business story of the year? (7)

   To be sure, there were clues to be found. In a March 2001 Fortune article Bethany McLean raised what, in retrospect, should have been a provocative question: How does Enron make money? (8) At the time, her query might have seemed mildly out of sync. Enron was, after all, the corporation that Fortune had ranked as the most innovative company in the country (9) and as one of the "100 Best Companies to Work For." (10)

   But McLean's research unearthed some ominous warning signs about Enron's financial soundness. In the first nine months of 2000, for example, Enron's debt rose by nearly $4 billion, and almost all of its earnings in the previous two years had come from sales of assets that Enron inexplicably booked as recurring revenue. Yet despite the obvious implications of her article, neither Wall Street nor the financial press rose to the challenge.

   Enron's fortunes took a turn for the worse when CEO Jeff Skilling abruptly resigned in August 2001 for unspecified "personal reasons" after just six months on the job. Skilling's sudden departure raised red flags for Wall Street Journal reporters John Emshwiller and Rebecca Smith. Why would Skilling--who described himself as "brilliant," (11) said he had never failed at anything, (12) and had recently been featured in Worth magazine as one of the top 50 CEOs in the country (13)--suddenly walk away at the pinnacle of his career? Why would he abandon a $20 million severance package and become obligated to repay a $2 million loan that Enron would have forgiven had he stayed just another four months on the job? (14)

   At about the same time that Skilling left, analysts reported what they described as "aggressive" insider selling of stock by Enron executives, who collectively sold 1.75 million shares in 2001 while the price of the stock was going down. (15)

   Then came the bombshell. In October, as Emshwiller and Smith continued to dig deeper to find out why Skilling had suddenly left, Enron announced a $618 million third quarter loss and a $1.2 billion reduction of shareholder equity. Twenty-four days later, Enron descended into the hell of the largest corporate bankruptcy in U.S. history, intense regulatory scrutiny, and criminal investigation. The nation's seventh largest corporation, it seems, was a financial house of cards. Where were all the financial journalists?

   Enron's October earnings report riveted financial reporters' attention on the questions McLean had raised more than six months before. The Wall Street Journal and the New York Times alone featured more than 250 Enron stories in the ten weeks between the earnings report and the end of the year. (16)

   Over the next four years, Enron and other financial fraud scandals remained major fixtures in the national press. Indeed, in May 2006--the month in which the verdict in the Skilling-Lay trial was announced--the Enron scandal was the third most reported story in both the Journal and the Times. Only terrorism and illegal immigration received more prominent coverage.

   Thus, despite a sluggish start at the gate, the media ultimately provided comprehensive and sustained coverage of a seemingly endless stream of scandals and their aftermath. Ironically, journalists' failure to pursue the Enron story early in the game ultimately underscored how important the comprehensive coverage that it later received would be to fully understanding the breadth and depth of the breakdown in corporate governance.

   Yet despite much praiseworthy reporting, press coverage of five high-profile criminal trials arising out of the scandals raised troubling questions about media judgment and restraint. Part II of this Article--Juries, the Media, and the Courts--focuses on the jury deliberations in the trial of Tyco CEO Dennis Kozlowski and the jury selection process in the Martha Stewart trial. During the Kozlowski trial, several newspapers--including the Wall Street Journal--broke with journalistic tradition by publishing personal details about a juror who reportedly flashed an "OK" sign to the defense table during jury deliberations. The ensuing publicity over the courtroom incident ultimately led to a "mistrial by media." In the Martha Stewart trial, intense media interest in covering all aspects of the proceedings led some journalists to violate a judicial order that forbade contacts with jurors until their service was over. Concern about overly aggressive media coverage prompted the judge to modify the jury selection process, which in turn produced--at least in part--a "trial without media."

   Part II teases out the legal and practical implications of these two scenarios and suggests that journalistic mishaps like the one in the Tyco trial could well have the effect of encouraging risk-averse jurists, like the judge in the Stewart trial, to adopt more restrictive rules governing media coverage of high-profile trials.

   Part III--The Media as Public Relations Machines--explores the growing phenomenon of high-profile defendants' use of well-orchestrated and increasingly costly multi-media campaigns to "set the record straight." The prosecutions of Arthur Andersen for shredding Enron documents and of Enron CEO Ken Lay for defrauding Enron investors provide the backdrop for exploring this phenomenon. They illustrate how such public relations campaigns can (and increasingly do) employ the technique of demonizing others--including prosecutors, witnesses, and the press--in order to exonerate themselves. The case of HealthSouth CEO Richard Scrushy builds on that theme but adds another troublesome dimension--injecting the issues of race and religion into the mix to manipulate the outcome of a trial. Part III uses these three prosecutions to explore the potential corrosive effect such public relations strategies can have on the criminal justice system.

   Part IV--Praise or Blame?--poses a series of questions raised by the analyses in Parts II and III. These questions reveal growing points of tension between the media and the courts. While there may be no definitive answers, Part IV posits that, if continued unchecked, aggressive media tactics in high-profile trials are likely to invite closer judicial scrutiny of media coverage and of the roles that defendants and their lawyers play in manipulating the media to sway public opinion.

   Three appendices at the end of the Article provide a "media-centric" postscript on coverage of the corporate governance scandals. Appendix A discusses traditional print source coverage and the Enron "media frenzy" that Ken Lay and Jeff Skilling blamed for Enron's collapse. Appendix B examines recent innovations, including the creation of a special media room in Houston's federal courthouse, that are transforming coverage of major trials by the mainstream media. And last, Appendix C considers two issues that take on increased significance in the age of electronic journalism--source credibility and the permanency (or lack thereof) of information that has historical value.

2. JURIES, THE MEDIA, AND THE COURTS

   Recent high profile trials have increasingly thrust jurors into the limelight. To be sure, post-trial interviews with jurors have shed light on the dynamics of jury deliberations and the idiosyncrasies of individual jury members. A prime example is Chappel Hartridge, an outspoken juror who commented extensively on the Martha Stewart trial.

   Hartridge spoke at length in widely covered...