Colorado Proposes Tough Law on Executive Accountability
By Dan Frosch
New York Times
Tuesday, April 1, 2008

DENVER — For 30 years, Lew Ellingson loved being a telephone man.

His job splicing phone cables was one that he says gave him “a true sense of accomplishment,” first for Northwestern Bell, then US West and finally Qwest Communications International.

But by the time Mr. Ellingson retired from Qwest last year at 52, he had grown angry.  An insider trading scandal had damaged the company’s reputation, and the life savings of former colleagues had evaporated in the face of Qwest’s stock troubles.

“It was a good place,” he said wistfully. “And then something like this happened.”

Now, Mr. Ellingson is the public face of a proposed ballot measure in Colorado that seeks to create what supporters hope will be the nation’s toughest corporate fraud law.

Buttressed by local advocacy groups and criticized by a Colorado business organization, the measure would make business executives criminally responsible if their companies run afoul of the law.  It would also permit any Colorado resident to sue the executives under such circumstances.  Proceeds from successful suits would go to the state.

If passed by voters in November, the proposal would leave top business officers having unprecedented individual accountability, said Mr. Ellingson, a member of Protect Colorado’s Future, a coalition of advocacy groups that supports the initiative.

“If nothing else, these folks in charge of the corporations and companies will think twice about cutting corners to make themselves look more profitable than they really are,” he said.

The plight of Mr. Ellingson’s former employer, Qwest, based in Denver, was a motivation for the proposal, said Jess Knox, executive director of Protect Colorado’s Future.

Last April, a jury in Denver convicted Qwest’s former chief executive, Joseph P. Nacchio, of 19 of 42 counts of insider trading.  Mr. Nacchio was sentenced to six years in prison and ordered to pay a fine of $19 million and forfeit $52 million in money he earned from stock sales in 2001.

In March, however, a federal appeals court panel reversed the conviction on the grounds that a judge had improperly excluded expert defense testimony.

The panel ordered that Mr. Nacchio receive a new trial in front of a different judge.

“The reality is that for years, not just in Colorado but in many states, citizen taxpayers have paid the price for C.E.O.’s and companies who break the rules in order to get ahead,” Mr. Knox said.

Ultimately, the proposal would extend criminal and civil liability to executives who knew about corporate fraud and did nothing to stop it, but who were not necessarily involved in it, said Mark Grueskin, a lawyer for Protect Colorado’s Future.

Not surprisingly, the proposal, and subsequent versions with alternative language that have been suggested by Protect Colorado’s Future, has generated sharp opposition from Colorado’s business community.

If the measure is approved, some fear that the courts will become overwhelmed with frivolous lawsuits.  Those lawsuits, in turn, could bankrupt small and midsize companies and make it more difficult for legitimate lawsuits to succeed, said Joe Blake, president and chief executive of the Denver Metro Chamber of Commerce.

“We’re very concerned that any number of people could crowd the docket and frustrate the court system with suits that are perhaps well-intentioned but highly frivolous,” he said.  “We’re going to have chaos out here.”

Mr. Grueskin countered that the measure would parallel current state law and require plaintiffs to pay for their lawsuits if a court ruled that they were frivolous.

“There is an inherent disincentive to use this as a means for a gadfly to act as a corporate obstructionist,” he said.  “I would be surprised if there would be many responsible companies that would have a problems with this.”

Legal fees aside, Dean Krehmeyer, executive director of the Business Roundtable Institute for Corporate Ethics at the University of Virginia, which conducts ethics training for executives and directors, says the litigious nature of the measure could create a chasm between businesses and their communities.

“Leading business organizations and communities can create value by working in partnership, not necessarily by using the courts as a first option,” he said.

The measure, whose language was already approved by a state title board, must receive 76,000 signatures in support within six months to be placed on the November ballot.  Protect Colorado’s Future said it planned to start a signature campaign.

A lawyer for the chamber of commerce, Doug Friednash, said the business group would file a challenge to the proposal in Colorado Supreme Court on Tuesday.  He said the language could mislead voters into thinking they were supporting a measure that simply cracked down on crooked executives, as opposed to one that left business owners and other employees susceptible to lawsuits.

But Protect Colorado’s Future has already drafted a modified version, cleared by the review board, that limits the initiative to executive officials, its true intention, the group said.  The chamber of commerce, has asked the board to reconsider its decision on that version at a hearing on Wednesday.

Regardless of which version of the measure is put to voters, Mr. Ellingson predicts that Coloradoans, with the fallout from Qwest still fresh, will back the proposal in overwhelming numbers.

“I don’t know who can oppose this.  This is common sense,” he said.  “We need businesses to survive, but we don’t need criminals running them.”

http://www.nytimes.com/2008/04/01/business/01fraud.html?_r=1&ref=business&oref=slogin