What Are Your Chances of Going to Jail?
from
July/August 2002
by John R. Engen
Corporate directors have long faced the prospect of civil liability for insider trading, poor oversight of companies that lose class-action shareholder suits, and more. But to many people, the idea of board members doing jail time for their misdeeds still seems far-fetched.
The Securities and Exchange Commission would like to change that perception. Stephen Cutler, the agency’s enforcement director, recently told securities lawyers that he’s eager to “heighten the personal accountability of officers and directors who elect to place their own interests ahead of those of the company or its shareholders. Criminal sanctions are the ultimate means of achieving this effect, and we will work closely with U.S. Attorneys’ offices to obtain such sanctions.”
But just how likely is that, really?
For outside directors, legal experts say, the odds of going to jail are virtually nil. Even if a company’s top executives are involved in shady dealings, it’s next to impossible to implicate individual board members, who are charged with broad oversight duties but not day-to-day monitoring.
At Enron, for instance, a special committee investigating the collapse concluded that directors had been briefed on the company’s controversial partnerships and that Enron might have avoided disaster if its board had been more vigilant. Even so, the legal experts note, no one is talking about criminal charges against the directors. “Criminal responsibility is personal,” says Joel Winograd, a white-collar criminal-defense attorney with Winograd & Winograd in New York City. “Unless an independent director is personally involved in the illegal activity, they won’t be charged.”
For officer-directors, the risks are somewhat higher. Recent years have witnessed a handful of board-level executives facing prosecutors intent on righting past wrongs with a jail sentence. Among them: Donald Ferrarini, chairman and CEO of the New York City insurance brokerage Underwriters Financial Group, who is currently serving a 12-year sentence for a scheme that included reporting fictitious revenues.
Clifford Hotte, the founder, former CEO, and chairman of Health Management Inc., is appealing a nine-year prison sentence after being found guilty of falsifying records to meet earnings goals. This year two former executives of CUC International Inc., Walter Forbes and E. Kirk Shelton, are scheduled to face charges of manipulating financial numbers in connection with CUC’s merger with Cendant Corp. “If they’re convicted, they’ll face some hefty prison time,” says Michael Drewniak, a spokesman for the U.S. Attorney’s office in New Jersey, which is prosecuting the case.
But such criminal prosecutions are limited. Unlike civil charges, which need only proof of negligence to stick, a criminal conviction requires proof beyond a reasonable doubt that the accused intentionally engaged in fraudulent conduct. That’s a tough standard, calling for plenty of gumshoe work.
Often the Justice Department will launch investigations itself, as it has with Enron. In other cases, the SEC refers evidence of criminal wrongdoing to individual U.S. Attorneys, who must then conduct their own investigations. “Prosecutors have to determine on their own if there’s a provable case, and if it’s of sufficient magnitude to devote money and bodies to it,” explains former federal prosecutor Paul Fishman, who now defends white-collar criminal defendants for the New York City and Newark, New Jersey, law firm Friedman Kaplan Seiler & Adelman.
More often than not, prosecutors opt to drop such cases. According to TRAC, a tracking service run by Syracuse University, SEC enforcement officials sent 609 potential criminal cases Justice’s way from 1992 through 2001. Only about a third of those were prosecuted, and just 87 defendants wound up serving jail time.
The wild card is the Enron fallout. Legal observers agree that at least some of the corporation’s officers will be prosecuted, and even its new CEO, Stephen Cooper, has predicted that executives could “end up going to jail.”
Could this ill will spread to other corporate leaders? Some attorneys think so. Federal prosecutors are political animals who respond to public demands and perceptions. In the 1970s they pursued organized crime with a vengeance, later turning their attention to street criminals and drug lords. Winograd notes that more Americans than ever have invested in the stock market and feel personally vulnerable to corporate misconduct. “The public is clamoring for the heads of major corporate leaders and accountants,” he says. “The whole pendulum has swung.”
Benjamin Brafman, a white-collar criminal-defense attorney at Brafman & Ross in New York City, says that the air of mistrust could eventually suck in independent directors who “close their eyes” to alleged wrongdoing. He recommends that directors pay more attention to board proceedings and be unafraid to challenge executives.
“People who join a board to pick up a fee or get it on their résumé,” he says, “can find themselves embroiled in massive litigation without doing anything wrong aside from being lazy.”
