cooperate by a 32-year-old novice federal prosecutor named Leslie Ragon Caldwell.
Since then, in prosecuting mobsters, drug dealers, crooked "chop house" brokerage firms, and corporate malefactors, Caldwell has gained a reputation as a master of cases of mind-numbing complexity. Along the way she has become a master of the "flip" -- the cultivation of "cooperators" who can turn dry documents and staticky tape recordings into flesh-and-blood crimes.
All of this is bad news indeed for former executives of Enron, Arthur Andersen, and other companies being targeted by Caldwell, a Pittsburgh native who was named in January to head a Justice Dept. task force exploring criminal charges in the Enron Corp. scandal. "I think any potential defendants in the Enron case will have a bleak and weary day ahead of them," says Joel Winograd, a New York criminal lawyer.
DAUNTING CASES. The conventional wisdom -- that any Enron prosecution would face huge obstacles -- ignores the impressive array of weapons available to prosecutors, as well as the recent spate of successful cases involving complex frauds. Some of the most daunting, which also resulted in the heaviest sentences, were prosecuted by Caldwell and her deputy, Andrew S. Weissmann, who is chief of the criminal division of the U.S. Attorney's office in Brooklyn.
One weapon that may be used against future Enron defendants is a little-noted recent change to the federal sentencing rules that beefs up sentences for frauds in excess of $100 million. Such schemes previously would have warranted a 51-month sentence for a first offender but now can draw a sentence of 10 years or more. To be covered by the new guidelines, some part of the fraud must have occurred after Nov. 1, 2001 -- which may turn out to be a crucial date on the calendar for people
involved in the Enron mess.
Ironically, Caldwell's appointment was necessitated by an embarrassment -- the recusal of Attorney General John Ashcroft and the U.S. Attorney's office in Houston because of their Enron links. Caldwell, who moved from Brooklyn to San Francisco in 1998, has not granted interviews, and the composition of her team has not been announced. But BusinessWeek has learned that among the lawyers on board with Caldwell is Zachary Harmon, an attorney from the Justice Dept. tax division -- a
sign that investigators are probing possible tax-law violations. Also joining the team are Thomas Hanusik from the Justice Dept. fraud division, William Kimball, who worked with Caldwell in San Francisco, and Samuel W. Buell, who prosecuted leading Boston mobsters.
EFFECTIVE DEFENSE? The difficulties facing Enron prosecutors are epitomized by the defiant public stance of former Enron CEO Jeffrey Skilling. In his testimony before Congress, Skilling insisted that he was not aware of what went on at Enron because, among other things, the company's practices were endorsed by its accountants at Arthur Andersen. While Skilling's story was openly mocked in Congress, it could prove an effective defense against criminal charges.
Overcoming the "Andersen said it was O.K." defense will require countervailing testimony from insiders. Lawyers who have defended and prosecuted white-collar cases are unanimous on the point: no cooperators, no successful Enron prosecution. By providing a "road map" for prosecutors, and explaining offenses to jurors, cooperating witnesses proved crucial in dozens of cases brought by Caldwell and her
former colleagues in Brooklyn against organized crime and the operators of chop-house brokerage firms.
One brokerage principal prosecuted by Weissmann, Robert Catoggio of Hanover Sterling & Co., was sentenced to 12 years in prison. As in all such cases, the Hanover case was strengthened by cooperating witnesses. "If I know Andrew, he'll have six cooperators lined up by the time he gets to Houston," says Winograd, who has represented mobsters and rogue brokers prosecuted by Weissmann.
FACTS OF LIFE. Lawyers say Caldwell is probably actively hunting for as many cooperators as she can assemble, be they high-level executives or lower-level employees who had access to crucial information. "In this case, the key to a successful prosecution in Enron is the government's ability to explain the facts of life to low- or mid-level Enron employees and get them on board to cooperate against higher-ranking individuals," says Benjamin Brafman, a New York criminal lawyer whose clients have ranged from associates of John Gotti to rapper Sean "Puffy" Combs.
Cultivating cooperators is a sensitive task, a mixture of threat and cajolery. The threat is the prospect of a heavy prison sentence. While it's possible to lure cooperators by offering immunity -- a "no-pros," or no prosecution deal -- lawyers familiar with their work say Caldwell and Weissmann have not generally resorted to that. More commonly, cooperating witnesses have been persuaded to plead guilty to criminal charges or indictments that are placed under seal. This prevents former
associates from knowing that they've "turned."
That can be crucial because cooperators often are asked to rat on their pals. To earn the possibility of a reduced sentence, they are commonly "wired" to record conversations with former associates -- a technique used effectively against both white-collar and organized-crime defendants over the years. Those incriminating recordings are then used to induce still more guilty pleas and, often, still more cooperating witnesses.
NO COUNTRY CLUB. Enron defendants may face an additional inducement to cooperate -- the possibility of charges under the Racketeer Influenced & Corrupt Organizations Act, which carries stiff prison terms. But even without a RICO prosecution, the potential penalties for white-collar crime are far more severe than is commonly believed. Federal guidelines, introduced in 1987, curtailed parole and severely restricted the sentencing discretion of federal judges. Sentences are now largely determined by those guidelines, which incorporate a variety of factors.
The new guidelines for megafrauds could mean hard time for Enron defendants in prisons that rarely match the "country club" stereotype. While federal minimum-security prisons are not bastilles, they are hardly pleasant places to spend a few years. "Your whole life is regulated -- when you go to the bathroom, how many phone calls you can make, how much money you can spend in the commissary, when you get up
and when you go to sleep," says Gustave Newman, a lawyer for Hanover's Catoggio, who is appealing his sentence.
Of course, the machinations at Enron may not have sunk to the depths of criminal activity. But by naming prosecutors with a track record of nailing white-collar crooks, the feds have at least gone a long way toward ensuring that, if criminal acts were committed, the bad guys will actually go to jail. By Gary Weiss in New York