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White-Collar Crime: Who Does Time?


Does corporate crime pay? The record can seem pretty arbitrary. Tyco International Ltd.'s (TYC) L. Dennis Kozlowski and WorldCom Inc.'s Bernie Ebbers got hammered for their misdeeds. But plenty of other corporate and financial titans at companies engaged in chicanery have come away only mildly bruised. Michael Milken, the embodiment of an earlier generation of scandals, served less than two years and left prison in 1992 with a fortune of roughly $500 million. Banker Frank Quattrone, a key figure in the more recent brouhaha over allocation of initial public offerings, faces 18 months and will keep much of the $200 million he made in the late 1990s.

Some beat the rap altogether. HealthSouth Corp.'s (HLSH) Richard M. Scrushy, acquitted of charges he directed a $2.7 billion fraud, remains one of the largest shareholders of the chain of rehabilitation centers. A host of others at scandal-wracked companies, such as Global Crossing Ltd. (GLBC) founder Gary Winnick, pocketed millions from stock sales and faced no criminal or civil charges at all.

As haphazard as these outcomes may appear, there are rules of thumb to keep in mind as the trial of Enron Corp.'s Kenneth L. Lay and Jeffrey K. Skilling gets under way in Houston. Here are a few:

MORE PUNISHING TIMES Generally speaking, convicted corporate figures get punished more harshly today than they did in the late '80s and early '90s. Milken, now-defunct Drexel Burnham Lambert's king of high-interest "junk" bonds, pleaded guilty to conspiracy and securities fraud in 1990 in exchange for a 10-year sentence, later reduced to 22 months for good behavior and cooperation with prosecutors. A defendant of his notoriety would not get off as lightly today, according to veteran prosecutors.

Federal sentencing guidelines, which weren't in effect when Milken's crimes took place, have ratcheted up the penalties for white-collar offenders, particularly where huge shareholder losses are involved. Attitudes have also changed. Public outrage over Milken's stock-manipulation schemes was relatively muted because the victims were primarily companies and faceless institutional investors. By the late 1990s, however, roughly half of American households had piled into the stock market, according to the Investment Company Institute, many through retirement plans. When the bubble burst in 2000, legions saw their brokerage accounts and 401(k) balances dip sharply. As it became clear that fraud lay behind some of the biggest corporate collapses, a large constituency demanded severe consequences, says Ira Lee Sorkin, a former prosecutor and official with the Securities & Exchange Commission now in private practice. "Middle America lost a lot of money, which has led to cries for tougher enforcement to put the scoundrels away," he says.

Financial penalties have become stiffer, too. Convicted in July of orchestrating the $11 billion accounting fraud at WorldCom, onetime billionaire Ebbers has little left to his name after settling with regulators, shareholders, and his former company. Adelphia Communications Corp. (ADELO) founder and ex-CEO John J. Rigas, who received a 15-year sentence on fraud and conspiracy charges related to the looting of the cable-TV provider, faces a similar financial fate. He is appealing.

GREED ISN'T A CRIME Many companies played accounting games during the 1990s boom. But neither greed, dubious bookkeeping, nor suspiciously timed trading are necessarily criminal. Prosecutors must demonstrate not only that an action violated a specific law but also that the executive intentionally committed the bad act. "The evidence is very rarely black and white, and the law is often amorphous," says Steven R. Peikin, a former federal prosecutor now in private practice.

Ebbers and Winnick played similar roles as evangelists of the telecom boom, and both racked up huge stock gains before their companies crumpled. But while Ebbers will likely report to federal prison in Yazoo City, Miss., if he loses his appeal, Winnick hasn't been charged with a crime. The difference: The scam at WorldCom -- pretending that everyday expenses were capital investments, which artificially boosted earnings -- unmistakably violated accounting standards and securities law. Global Crossing did swaps of fiber-optic network capacity that made it look stronger financially than it was. But the swaps weren't clearly illegal.

Winnick had another big advantage: Unlike Ebbers, he wasn't his company's chief executive. As co-chairman of Global Crossing's board, Winnick persuaded investigators that he wasn't personally enmeshed in the company's problems. Enron's Lay, who served as both chairman and CEO at various times, is expected to attempt a similar defense.

Quattrone, a star banker at Credit Suisse First Boston (CSR), helped dole out hot IPO shares to favored clients and supervised analysts who allegedly boosted wobbly Internet companies. But these practices, distasteful as they are to many, didn't lead to charges because they didn't violate any law. He was convicted of obstructing justice and witness tampering for suggesting, after learning of a grand jury probe, that workers tidy up their e-mail. He is appealing.

DEAL OR ROLL THE DICE Some of the hit-or-miss feel of white-collar justice stems from the defendant's dicey choice of pleading vs. facing a jury. Given the difficulties of proving complex frauds, prosecutors typically try to strike deals with midlevel executives to build cases against the top bosses. The difference in sentencing can be huge. Compare the five years WorldCom CFO Scott D. Sullivan got for helping prosecutors nail his boss with the 25 that Ebbers might serve.

But juries can exonerate as well as convict. Last summer, Scrushy fended off charges that he was at the center of the accounting fraud that permeated HealthSouth. Prosecutors thought they had a strong case, based on testimony from five former HealthSouth chief financial officers, who all pleaded guilty and implicated Scrushy. But his team poked holes in their testimony, and he played his hometown advantage shrewdly. He drew visible support from black pastors in Birmingham, whose presence as courtroom spectators may have impressed some members of the predominantly black jury. "The world may have thought he'd be convicted, as they now think Ken Lay and Jeff Skilling will be," says Robert Morvillo, a New York defense lawyer. "But trials take on a life of their own."

By Jane Sasseen, with David Polek


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