From the

• Author: Daniel Abrams
• Position: JD/MBA Candidate
• Pages: 04

Daniel Abrams is a second-year JD/MBA candidate at American University Washington College of Law and the American University, Kogod School of Business focusing on entrepreneurial studies and corporate law. Mr. Abrams received his BA in Psychology from Tufts University. Mr. Abrams is currently on the executive board of the Sports & Entertainment Law Society.

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ONLY DAYS INTO 2004, THE ENTIRE LANDSCAPE of the current campaign against corporate crime changed dramatically. On January 15, 2004, two years to the day since Enron was de-listed from the NYSE, Andrew Fastow, the former CFO and architect of Enron's infamous "special purpose entities,"¹ pled guilty to two charges of securities fraud. Not only was this a reversal of his earlier not guilty plea, but it was a landmark prosecutorial event that exposes a forever- changed legal landscape. With a new vigor, the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) have embarked on a campaign to clean up the corporate world and, as a result, have changed the way corporate crime is prosecuted, perhaps forever.

Marred by slow progress and an increasing level of sophistication among corporate criminals, the government has been forced to find creative ways to maintain an appearance of toughness. With this new era of crime, a new method of crime fighting has emerged: winning the battle one headline at a time. In a society forever changed by the Internet, one which demands answers almost instantaneously, crime-fighting strategies have shifted from the courtroom to the living room. Cases are now tried on the 11 o'clock news and the sight of [substitute your favorite corporate crook here] being led into the courthouse in handcuffs is the opening and closing arguments for a jury comprised of the American public. After roughly 21,000 Enron employees lost the equivalent of $1 billion and most, if not all, of their retirement plans, there is no question that we are all tuned-in.

Age-old crime fighting dogmas of punishment and deterrence have a new companion: embarrassment - by way of the perp walk. The government can no longer afford a shocking allegation followed by a lengthy and drawn-out investigation. With a growing awareness of society's notoriously short attention span, the government is now forced to feed us, the future jurors of America, a constant stream of white-collar headlines, lest we forget their efforts, or even worse, cease to care. With this breakthrough, prosecutors may finally get inside access to Enron's boardroom and the long-awaited convictions of Enron superiors appear just over the horizon. Yet we are still hungry. Therefore, the government must tide us over, again and again. What's on the menu this week? The Martha Stewart special.

To understand the current status of this unprecedented era of corporate malfeasance, its background and development must first be explored. This new breed of corporate criminals did not arise extemporaneously. Like the financial missteps of every generation, these emerged in a series of largely unnoticed and sometimes innocuous events. During what has become known as the "dotcom bubble," unprecedented prosperity and corporate compensation revolutionized the business world. Stories began to appear of CEOs throwing lavish parties and jet setting across the country. Corporate officers developed a sort of movie-star persona, with the pay to match. With tax and accounting incentives that emphasized pay-for-performance and de-emphasized disclosure, much of this new compensation took the form of stock options and share packages. Senior executives and board members soon became the largest owners of their corporations' stock. This trend was supported not only by the directors, but also by pundits who believed that stock ownership theoretically aligned the interests of management with those of the shareholders. However, it was not long before directors realized that their personal wealth was intimately tied to stock performance - outright manipulation was not far behind. Soon, the only acceptable news was good news. Financial statement reporting started to resemble story telling, with P/E ratios going through the roof and investors, largely unaware or perhaps uninterested, rode the wave of "irrational exuberance" through the late 1990s until the bubble burst.

Corporations, however, were not the only ones to blame. The integration of large financial services companies, exemplified by Arthur Anderson, compounded the situation. Analysts performed disservices by urging investors to buy stock in companies Page 15that their banking colleagues underwrote. The same companies also had their auditors certify highly-manipulated financial statements while their lawyers justified what were often questionable practices in order to retain big clients and the generous legal fees they provided. CEOs could practically buy the influence they needed between big campaign contributors (i.e. Enron directors) helping to write Bush Administration policy² and widespread behind-the-scenes IPO trading.³

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In what has been two years of unprecedented corporate corruption and white-collar crime, beginning with Enron's bankruptcy, the largest in US history until WorldCom, a chain of events set in motion a new era of enforcement not seen since the Roosevelt era.⁴ When Enron's stock was de-listed at $0.67 (off its high of $81.39 only 12 months earlier) mounting public pressure forced the government into action. It was not long before President Bush responded by announcing his Ten-Point Plan to Improve Corporate Responsibility and Protect America's Shareholders⁵ and an executive order establishing a Corporate Fraud Tax Force with the Deputy Attorney General serving as chair.⁶ Meanwhile, not to be outdone by the President, Congress threw its legislative hat into the corporate accountability fray. Senator Patrick Leahy, a former prosecutor, and Chairman of the Senate Judiciary Committee, proposed Senate Bill 2010: the Corporate and Criminal Fraud Accountability Act of 2002. Addressing the Committee on the Judiciary, Sen. Leahy stated, "The inadequacy of current statutes and sentences available in white-collar cases is one of the most important issues facing our country ... The integrity of our judicial system depends on accountability."⁷ The reforms were groundbreaking and the Act passed unanimously in Congress as Section VIII of the Sarbanes-Oxley Act of 2002.⁸

Walk This Way

TO MATCH THE LEGAL DEVELOPMENTS, the government adopted a new and more attention-grabbing enforcement response to stop corporate crime before it starts. One effective and surefire way to make investors and the public pay attention is to lead a handcuffed CEO of a major public company past a slew of reporters into the courthouse. The effectiveness of the perp walk is unquestionable.

The government has even taken to providing the media with advance notice of the sensational scenes. For example, when enforcement officials showed up at former Adelphia CEO John Rigas' house to arrest him for allegedly looting the company of over $2.5 billion, they had already notified the New York media. It apparently mattered little that the 77-year old Rigas met both of the requirements needed to turn oneself in (not a threat to yourself or others; and not posing a flight risk).⁹ Prosecutors still rejected his request to arrange surrender. The government's decision to deter future crime in this manner trumps all complaints regardless of any possible embarrassment. Try as they may, there is no avoiding the perp walk.

Therefore, it comes as no surprise that significant legal challenges have been waged against the...