Sarbanes-Oxley and Ebbers conviction will put more CEO's in the hot seat

Ebbers Conviction Puts CEOs in Hotseat
March 22, 2005
By Greg Griffin, HireDiversity.com

A CEO's job is harder than it used to be. First, there were the corporate financial scandals at Enron, WorldCom, Qwest and other public companies that prompted widespread distrust of all chief executives.

Next came the Sarbanes-Oxley Act of 2002, which mandates corporate financial and accounting disclosure. It increased the risk of personal liability for CEOs as well as other officers and company directors. Separately, federal penalties have been raised for companies that fail to implement strict compliance programs.

Finally, CEOs have the example of Bernard Ebbers, former WorldCom chief executive, who was found guilty in New York last week of orchestrating an $11 billion accounting fraud. He faces the possibility of life in prison. "Any CEO in his right mind had better try to understand the financial affairs of his company," University of Colorado law professor Ted Fiflis said. "There's a much heavier responsibility on CEOs today."

The standard defense for corporate executives accused of wrongdoing has been to plead ignorance. Ebbers claimed that as CEO he wasn't knowledgable in accounting practices and was unaware of fraud at WorldCom, but the strategy failed. Richard Scrushy, on trial in Birmingham, Ala., for accounting misdeeds at HealthSouth, also contends the fraud was committed by subordinates without his knowledge. Scrushy's case is considered the first test of Sarbanes-Oxley since the CEO and his chief financial officers signed off on their reports as required by the law.

"Sarbanes-Oxley has made enforcement easier for the government and defenses more elusive for the accused," said Joe Smith, a partner in the Denver office of Bartlit Beck Herman Palenchar & Scott, which counsels some public-company board members and also tries cases involving securities and accounting fraud. "It has, in particular, become more difficult for officers and directors to lay blame exclusively with outside professionals like lawyers, accountants and investment bankers," Smith said. Even more than Sarbanes-Oxley, changed attitudes among regulators, federal prosecutors and the public toward accounting fraud have made the penalties high for those getting caught, said Jacob Frenkel of Shulman, Rogers, Gandal, Pordy & Ecker in Rockville, Md. That may portend badly for ex-Qwest CEO Joe Nacchio, who was charged in the past week along with six other former executives in a civil accounting-fraud case brought by the U.S. Securities and Exchange Commission.

"The conviction of Bernie Ebbers indicates that a CEO can be convicted for a false filing with the SEC even without detailed certification requirements," said Frenkel, a former SEC enforcement lawyer and federal prosecutor. "Five years ago, the Ebbers case would never have made it into the justice system," he said. "We are now at a point where the testimony of one CFO and no smoking gun can result in exposure to significant jail time."

ACCUSED CEOS

BERNARD EBBERS, FORMER CEO, WorldCom - SEC charges: None Justice Dept. charges: Convicted Tuesday, March 15th of securities fraud, conspiracy, false reporting.

KENNETH LAY, FORMER CHAIRMAN, ENRON - SEC charges: Securities fraud, false reporting, insider trading. Justice Department charges: Trial set for January on conspiracy, securities fraud and insider trading.

DENNIS KOZLOWSKI, FORMER CEO, TYCO - SEC charges: Securities fraud, false reporting, fraudulent stock sales. New York state charges: Second trial underway on grand larceny, conspiracy, tax fraud after April mistrial.

JOHN RIGAS. FOUNDER, Adelphia Corporation - SEC charges: Securities fraud, false reporting, self-dealing. Justice Dept. charges: Convicted of securities fraud, bank fraud and conspiracy on July 8.

JOE NACCHIO, FORMER CEO, QWEST - SEC charges: Securities fraud, conspiracy, insider trading stemming from activities from 1999 to 2001, when he received total compensation of at least $216.4 million. Court: No trial date set.

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