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Defending CEOs: Art, Science, Crapshoot


What Paris in 1865 was to artists and Vienna in 1900 to psychologists, New York in 2004 is to white-collar defense lawyers. It's history in the making. For one special moment, the most prominent legal legends are working side-by-side in lower Manhattan on behalf of the best, most reviled clients they're ever likely to see.

Consider the scene around Foley Square on Mar. 3. That's the day Reid H. Weingarten escorted former WorldCom Inc. CEO Bernard J. Ebbers into the federal courthouse to face charges of securities fraud. Elsewhere in the same building, Robert G. Morvillo, elder statesman of the New York criminal defense bar, was busy risking his reputation on behalf of the now-convicted Martha Stewart. And next door, Stephen Kaufman, the man who defended Michael Milken, was trying to punch holes in the government's case against ex-Tyco International Ltd. (TYC) CEO L. Dennis Kozlowski. "What we are seeing now is a test of the old-boy network," says Harvard Law School criminal law professor Alan M. Dershowitz. "They all have terrific reputations, and now they are being tested."

From the courthouse steps, experts critique the lawyers' daily performance. They have been hounding Morvillo, for instance, for mishandling the defense of Martha Stewart. Some second-guessers say she would not be facing jail if she had testified in her own defense.

But much of the commentary is superficial. For all the play-by-play, little light has been shed on the art of white-collar criminal defense. To understand what makes a performance great -- or inept -- involves digging into the tricky tactical challenges unique to this practice.

Defending an accused corporate criminal is one of the most difficult assignments a lawyer can take. Take the top 10 corporate lawyers, and they might each handle a complex merger in pretty much the same way. The top 10 white-collar-crime attorneys have no such template. Every case, every jury, every client is different. There's far more room for improvisation, surprise, and tactical gamesmanship in a high-profile corporate crime case than in, say, a copyright or antitrust lawsuit. Successful criminal defense lawyers also need a Spielbergian gift for storytelling and predicting how their audience will react.

That's why the top white-collar lawyers, a group of a roughly two dozen veteran former prosecutors who have been dominating the field for two decades, make up to $5 million annually. Once a boutique practice, corporate criminal defense has gone upscale. Blue-chip firms that used to eschew the practice are now recruiting at U.S. attorneys' offices, trying to meet their clients' demand for lawyers who can defend execs accused of fraud, insider trading, and tax evasion.

The artistry of the practice has been supplemented, in recent years, by a scientific dimension. Wealthy clients often test their attorneys, and their own performances, in front of mock juries. The cost? Up to $100,000 a pop. Focus groups and community attitude polls are also popular. Scientific witnesses, such as ink experts, frequently play a critical role -- such as the one who helped clear Merrill Lynch & Co. (MER) broker Peter Bacanovic of one charge of making a false document in the Stewart case. The true legal geniuses are those who balance science and art, jury management and client management, friendly plea-bargaining and fierce cross-examination. Here are the four key decisions lawyers face at each step of the way:

1 TALKING TO INVESTIGATORS

Whenever executives are involved in a potential crime, they usually get a phone call from prosecutors before too long inviting them to come in and discuss what happened. This is the first big gut-check for accused corporate criminals and their attorneys -- and where many go astray.

Exhibit A is Martha Stewart. On Feb. 4, 2002, lawyers from the New York firm Wachtell, Lipton, Rosen & Katz (Morvillo had not yet been hired) took her in for an interview with investigators from the Justice Dept., Securities & Exchange Commission, and FBI. That's when she aired her fishy story about the alleged $60 agreement for selling ImClone Systems Inc. (IMCL) stock. The feds didn't buy the alibi and charged her with lying to them -- the accusation that became the basis for her ultimate conviction.

If Stewart had never cooperated, she wouldn't be facing the likelihood of a jail sentence now. And Martha isn't alone. Two former Enron executives, Kevin A. Howard and Michael W. Krautz, have also been criminally charged for allegedly lying to federal investigators in voluntary pre-indictment interviews. Stories like these are common -- and they are a big reason why most of the defense lawyers interviewed by BusinessWeek generally don't allow their clients to speak to government investigators. "It's over my dead body that a client goes in and talks," says criminal defense attorney and novelist Scott Turow. "It just doesn't work out."

But there are a few exceptions to this rule. Managers who are have tangible proof of their innocence should go in and talk, as should those who are undeniably guilty. Sometimes executives who are involved in crimes with lots of co-conspirators can also help their cause by sprinting into the prosecutor's office to strike a deal first. In the Enron case, "there were a number of people who were on the bubble that the government struck deals with and opted not to charge," says one lawyer who represents several former employees. The Justice Dept. "needed witnesses, and it couldn't charge everybody."

2 ACCEPTING A PLEA BARGAIN

This is often the most important decision defense lawyers make. According to the Administrative Office of U.S. Courts., about 87% of all federal fraud cases are resolved with plea bargains. While great courtroom orators may get all the ink, they are not as valuable to most accused criminals as cagey behind-the-scenes negotiators. The most effective advocates are frequently the ones whose clients never set foot in a courtroom -- or better yet, are never charged.

The incentives to make a deal have never been greater. Why? Because the federal sentencing guidelines for white-collar criminals keep getting tougher, giving judges less discretion over penalties. That means that if a jury finds an executive guilty, defense lawyers no longer have much leeway to bail their clients out at the sentencing hearing. Unlike the old days, "the judge can't just say: 'You come from an impoverished background, you're a nice guy, you got wrapped up in this, and I'm going to go below the guidelines,"' says Houston criminal defense specialist Philip H. Hilder.

So why aren't many of the big names in the current round of cases -- including Stewart, Kozlowski, Rigas, and high-flying investment banker Frank P. Quattrone -- striking deals? Perhaps because they are not being offered such appealing terms. "The first rule of committing a crime in America is always [do so] with someone more important than you -- so you have somebody to turn in," says Dershowitz. "If you are Mr. or Mrs. Big, then you have nobody you can offer."

3 TAKING THE STAND

Once an executive decides to roll the dice with a jury, this is the next critical call. And no matter what the lawyer and the client decide to do, they are likely to be subject to second-guessing. Martha Stewart stayed mum -- and now many experts say she should have testified. Quattrone did take the stand and wound up with a hung jury. Yet one juror said he probably would have been declared innocent if he had kept his mouth shut. Now Quattrone is scheduled to face a retrial in New York on Apr. 13. Sometimes two defendants facing the same jury make different decisions. While Kozlowski did not testify, Tyco CFO Mark Swartz sat down for nine days to make his case directly to the jury.

For famous, intelligent, articulate executives, the temptation to look jurors in the eye and give them a persuasive sales pitch can sometimes be strong. It's something they have done many times in their lives. But there are enormous risks. Once a defendant decides to testify, prosecutors are allowed to introduce all kinds of new damaging evidence about their credibility -- including material about unrelated legal problems and petty lies they may have told in other settings. When Swartz testified that the Tyco board had approved a $12.5 million bonus he received in 1999, the prosecutors wheeled out superstar litigator David Boies, who was hired by the board to conduct an independent investigation. He told jurors that Swartz had contradicted his courtroom testimony by admitting in a face-to-face meeting that the bonus payment was a mistake.

An even greater danger in letting the defendant testify is that jurors may forget that the government has to prove its case beyond a reasonable doubt. Instead, they will simply focus on whether or not they believe the defendant's story -- applying, as a practical matter, a lower standard of proof. "When the client speaks, that overwhelms the other evidence," says Washington criminal lawyer Michael Levy. "It alters the burden of proof. Juries simply ask themselves: 'Do we believe what the defendant is saying?"'

4 REINING IN POWERFUL CLIENTS

This is, in some ways, the ultimate challenge for the Kaufmans, Morvillos, and Weingartens of the world. The people they are representing are confident risk-takers. They have probably made dozens of successful decisions in their lives that other people told them were stupid at the time. They boss lawyers around all day and often hold them in contempt as worrywarts.

As a result, CEO clients frequently ignore attorneys' advice on critical issues such as accepting plea bargains and testifying to a jury. They also tend to bristle at tough questioning, since they're accustomed to a world filled with obedient sycophants. "White-collar defendants talk down to people," says Houston lawyer Randy Schaffer. "You have to work hard with them to grind down their arrogance."

Not all corporate chieftains are willing to succumb to this learning process. Nor can they bridge the differences in wealth, power, and education that separate them from the people who will be judging them. That's why many of them, in this high season of white-collar crime cases, will be spending time behind bars. And sometimes, there's not much even the shrewdest lawyer can do about it. By Mike France in New York


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