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Lessons of past aided in convicting ex-CEO
But experts fear corporate crime cycle repeating
By Jeff Smith
Rocky Mountain News

Saturday, April 21, 2007

Thursday's conviction of former Qwest CEO Joe Nacchio on insider trading charges closes the book on corporate scandals stemming from the overheated technology markets and subsequent stock-market crash of 2001.  Many agree the crackdown against top-level executives was a resounding success -- putting such former CEOs as Enron's Jeffrey Skilling, Tyco's Dennis Kozlowski and WorldCom's Bernie Ebbers behind bars.  Nacchio is likely to get around 10 years in prison, pending appeal.

Government prosecutors learned that to be successful they needed to simplify complex cases and narrowly tailor charges.  The Nacchio prosecution team benefited from its experience trying cases against former executives at Enron, HealthSouth and Qwest.

But some experts question what's been learned to keep such cycles from recurring.  And they raise concerns about the shift from prosecuting companies to prosecuting mostly individuals, saying companies should be shamed in the public square too.

"We're having these prosecutions, we're getting convictions, yet the wrongdoing is continuing," said Russell Mokhiber, editor of the Corporate Crime Reporter in Washington, D.C.

He and others noted the ongoing scandal of executives backdating options to reap bigger stock profits.

"You would think that if the system was working, we wouldn't see wave after wave," he said.

Mokhiber said he doesn't know why that is but believes one reason is that big businesses have been pushing back -- in efforts to roll back reforms, or stop future reforms.

"I see the cycle repeating itself," concurred Mathew Hayward, an assistant professor of management at the University of Colorado.  "We just don't know what flavor it will be in the next few years."

Egos drive wrongdoing

Hayward thinks one of the common threads is senior executive egos.

"I think each of these executives got too full of themselves," Hayward said of such executives as Kozlowski, Ebbers and Nacchio.  "Each of them overreached, believing they could do more than what they (really) could do."

Hayward added that executives often are too "financially invested" in the issues, such as with huge stock option packages.  And some erroneously believe their decisions and actions can escape attention and consequences.  In short, they think they can outsmart regulators.

Convictions curb abuses

Government prosecutors deserve credit for curbing abuses and deterring white-collar crime.  Many high-profile executives are facing prison sentences of 10 years or more.  Nacchio, 57, could spend a good portion of the rest of his life in prison.

"The conviction of Joseph Nacchio is the latest success in our crackdown on corporate fraud and our effort to restore integrity to America's financial markets," Deputy Attorney General Paul McNulty, chairman of the President's Corporate Fraud Task Force, said in a statement after the Nacchio conviction.

Charlie Cray, director of the Center for Corporate Policy, a Washington nonprofit working to curb corporate abuses, said in an interview before the Nacchio trial -- he views the corporate fraud task force as something the government does "periodically on any issue to dampen the crisis."

"That's not to say the line attorneys aren't doing a good job (prosecuting cases)," Cray said.  But he said he's disappointed the Washington-based task force hasn't done more to analyze root causes of the problems, such as how stock options may create incentives for cooking the books.

Mokhiber gives government teams high marks for prosecuting and convicting individual executives.  The Nacchio prosecution team, led by Cliff Stricklin, included litigators from the U.S. attorney's office in Colorado and the Justice Department in Washington.

"Defense attorneys have a lot of resources in (fighting) these cases, and often the government is the underdog," Mokhiber said.  "It's kind of like the Colorado Rockies beating the New York Yankees."

Mokhiber, however, is concerned by the shift away from prosecuting companies to individuals, with corporations throwing individuals overboard so they won't be prosecuted themselves.

A criminal prosecution doesn't have to be a death penalty for a company, Mokhiber said, and he said he believes it would serve an important purpose.

"It would send a message that companies were not above the law, that they, too, could be shamed, and it would send a message to Wall Street," he said.  "Shame in the public square.  Now, we've effectively taken that off the table."

Fallen kingpins

Joe Nacchio is the latest to fall in the government's crackdown on corporate fraud. He joins:

  Martha Stewart
*  Ken Lay, Enron
  Jeffrey Skilling, Enron
  Andrew Fastow, Enron
  Bernard Ebbers, WorldCom
  John Rigas, Adelphia
  Dennis Kozlowski, Tyco

Location matters

Nacchio will be sentenced July 27, and if given prison time, he may choose a federal facility near his Palm Beach, Fla., home.

  A likely pick:  The Federal Prison Camp in Pensacola, Fla., on Saufley Field, an outlying Pensacola Naval Air Station base

smithje@RockyMountainNews.com or 303-954-5155

http://www.rockymountainnews.com/drmn/tech/article/0,2777,DRMN_23910_5497012,00.html