Magazine

On Trial


Call it the time of reckoning. After more than two years of corporate scandals, executives are finally facing a judge or jury. Some, such as Samuel D. Waksal of ImClone Systems Inc. (IMCC), are already paying their dues. In June the founder and CEO of the New York drug company was sentenced to 87 months in prison and fined $3 million for his role in an insider-trading scandal. As U.S. Attorney Jim Comey said, the sentence "shows that corporate crooks will serve real jail time."

In most cases, though, that remains to be seen. While a number of scandal-plagued executives will be trotted before the courts in the next few months, it's unclear how many of them will ever end up behind bars. Frank Quattrone, the former star dealmaker at Credit Suisse First Boston (CSR), faced as much as 25 years in jail on charges of obstruction of justice. But in October a judge declared a mistrial. The case will be retried in March. Domestic icon Martha Stewart goes on trial in January facing charges of securities fraud and lying to investigators about her sale of 3,928 ImClone shares. Stewart stepped down as chairman and CEO of Martha Stewart Living Omnimedia Inc. (MSO) in June after being indicted. Although prosecutors didn't actually charge her with the insider trading for which she was investigated, Stewart could still face jail time. Already, she has suffered huge financial losses from her company's shrinking stock price and drop in magazine ad pages, not to mention the overall blow to her reputation.

Perhaps the biggest shot to a top CEO's reputation came in the trial of former Tyco International Ltd. (TYC) CEO L. Dennis Kozlowski and former CFO Mark H. Swartz. With his penchant for extravagant parties and $6,000 shower curtains, Kozlowski has come to symbolize the excesses and greed of the late 1990s. Together, they are accused of stealing $600 million from the company and its shareholders. If found guilty, they face up to 30 years in prison. Kozlowski is also battling charges of sales tax evasion on art purchased in New York.

For the sheer volume of losses, though, it's hard to top the folks at WorldCom Inc. with its $11 billion accounting fraud. On Feb. 2, former CFO Scott D. Sullivan will stand trial on federal charges of defrauding investors through false statements. While Sullivan has maintained his innocence, four other former executives have pleaded guilty to fraud-related charges: Troy M. Normand, director of legal entity accounting; Betty L. Vinson, director of management reporting; controller David F. Myers; and Buford T. Yates Jr., director of accounting. All have settled civil charges with the Securities & Exchange Commission and have been barred from serving as officers with public companies. Their boss, former Chairman and CEO Bernard J. Ebbers, was charged with filing false information to the SEC by the state of Oklahoma, but that case has been dismissed until after Sullivan's trial. State Attorney General W.A. Drew Edmondson said he will refile charges as early as March.

Another top executive who claims no knowledge of any wrongdoing around him is former HealthSouth Corp. CEO Richard Scrushy. The founder of the Birmingham (Ala.)-based rehab hospital chain is alone among former colleagues in claiming innocence in the $2.74 billion accounting scandal. So far, 16 former executives have pleaded guilty to participating in the fraud. Among the guilty are four former CFOs -- including William Owens, who last held the position under Scrushy -- and a former treasurer, Malcolm McVay. Five have been sentenced so far, with only one, former assistant controller Emery Harris, getting jail time. Scrushy convinced a judge to postpone his trial, allowing more time to prepare his defense against all 85 charges, including fraud and money laundering.

The accounting scandal at Gateway Inc. (GTW), in contrast, looks a little more contained. The direct seller of PCs saw SEC fraud charges filed against three former executives on Nov. 13: CEO Jeff Weitzen, CFO John Todd, and Controller Robert Manza. They're charged with "numerous small accounting tricks" to inflate revenues by 6.5% and earnings by 30% in the third quarter of 2000. While the trio don't face jail time, the SEC wants them to be fined and prevented from serving as company directors.

Even those who have retired from the corporate scene aren't above answering for past actions. Take the case of John Rigas, known as Mr. John, the kindly benefactor who helped locals in Coudersport, Pa., pay for medical expenses. In mid-February, federal prosecutors will begin their case against 78-year-old Rigas and his sons Timothy and Michael for allegedly bilking cable operator Adelphia Communications Corp. (ADELQ) and its shareholders out of more than $2 billion through a complex scheme in which funds they co-borrowed along with the company were spent on such personal items as New York condos, airplanes, a professional hockey team, and building their own golf course.

Rigas and his sons have pleaded not guilty, saying they did everything with the knowledge of Adelphia's board. But the board, after an internal investigation, has also filed suit against the Rigas clan. The family's biggest problem: Former Finance Vice-President James R. Brown has pleaded guilty and has implicated Rigas and his two sons. Looks like another corporate drama will soon unfold.


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