Guilty Verdicts Give Executives a New Focus: Risk of Prison

Monday, March 8, 2004
By Alex Berenson

New York Times Writer

"A lot of these people think they can talk their way out of anything, and with all their power, their contacts, their cleverness, they can be fine," he said. "It's jarring to be told if you aren't candid with the right people, 'My God, jail time.' That's a powerful, unsettling message, and I think deterrence comes from powerful, unsettling messages."

To one of the jurors in the Martha Stewart trial, the guilty verdict reached on Friday "sends a message to bigwigs in corporations," said Chappell Hartridge of the Bronx. "They have to abide by the law. No one is above the law."

In the last two years, prosecutors and juries have repeatedly sent corporate America the message that white-collar crime is a crime after all, starting with the prosecution of the accounting firm Arthur Andersen, which resulted in its conviction and demise in 2002. Since then, dozens of executives at Enron, Tyco International and other big public companies have been charged with fraud, obstruction of justice and other crimes. Many have pleaded guilty; others are being tried or awaiting trial.

Now the prosecutions may have reached a critical mass that will make executives think twice before lying to shareholders and federal officials, experts on white-collar crime say.

No one expects corporate executives to suddenly give up their pay packages and devote their lives to good works. But they may back away from the aggressive accounting practices and tax shelters that became common even among blue-chip companies in the last two decades, as well as some of their more egregious perks.

"The pressures on executives to cut corners and shade the truth is very strong, and there's a lot of rationalization that goes on," said Donald C. Langevoort, a professor at the Georgetown University Law Center, and a former lawyer for the Securities and Exchange Commission. Often, executives tell themselves that questionable decisions are for the good of their companies, not personal gain, Mr. Langevoort said.

Now they will have to think about how a prosecutor or jury might view their actions, he said. The convictions are "going to hit home for a lot of executives."

Kirby D. Behre, a former federal prosecutor who is a white-collar defense lawyer at Paul, Hastings, said senior executives had already become warier of pushing legal boundaries. "I think the effect is already incredibly profound," Mr. Behre said. "The wake-up call was sent and received in a huge way."

Of course, some companies will still be tempted to use accounting gimmicks, pay off officials in countries where bribes are a part of doing business and look for ways to avoid taxes. Moreover, while corporate boards have begun to question management more aggressively, executives are still in charge, and some will undoubtedly try to line their pockets at the expense of shareholders.

But the current wave of cases has shown executives that they can face long prison terms for the sort of accounting gimmickry that during the 1990's often led to little more than minor civil charges from the S.E.C. Just as federal prosecutors used aggressive prosecutions in the 1980's to force Wall Street to change its view toward insider trading, which was long considered a minor offense, the new cases have compelled some executives to rethink their attitude toward fraud.

(More: NYTimes.com / Business)

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Dan