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The Feds Get Tough

Sep 23, 2002 | US News & World Report

Nothing has shaken the ranks of scandal-tainted corporate executives more than reports that a federal marshal is overseeing the sale of an unfinished $4.2 million mansion in Houston's ritzy River Oaks district. With four bedrooms, six fireplaces, and Italian flagstone flooring, the manse was to have been the new home of Andrew Fastow.

Although Enron's former chief financial officer has yet to be charged with any offense, prosecutors have alleged the chic property is an asset purchased with the proceeds of criminal activity. The Department of Justice, in a tactic usually reserved for drug kingpins, is using its considerable legal muscle to lay claim to this and other Enron-derived wealth.

The asset grab is only one demonstration of the hardball approach the feds are taking in criminal investigations into fraud not only at Enron but also at other disgraced firms like WorldCom and Adelphia. White-collar investigations typically wend on for years, with the majority of securities violators resolving charges discreetly with a fine plus an agreement to steer clear of publicly traded companies. In the rare instances where criminal charges are filed, targets surrender quietly. But these polite practices have been thrown to the wind with this year's corporate accounting debacles. Public outrage has given the Justice Department the impetus to move quickly, aggressively, and openly against crime in the corner suites. (New York prosecutors and the Securities and Exchange Commission also have joined in, leveling new charges last week against three former Tyco officials, including chief executive L. Dennis Kozlowski.) Emblematic of this drive was this summer's televised arrest of the 78-year-old founder of cable firm Adelphia, John Rigas, by authorities who rejected his offer to give up in private.

"It's showtime for the government," says Christopher Bebel, a former securities prosecutor now in private practice in Houston. "By capitalizing on the tremendous media exposure associated with these cases, the government is able to broaden its impact–not only to prosecute individuals but to carry out its responsibility to create a deterrent effect."

Tough cases. It may take months before it becomes clear how successful the Justice Department's tactics against corporate fraud have been. Sure, the government has already handcuffed former WorldCom executives and inked a dramatic plea agreement with a well-placed Enron official. But behind the scenes, prosecutors still face the hard job of building enough evidence to show that higher-ups at both firms knowingly and actively participated in wrongdoing. So far, their chief targets remain defiant, but prosecutors are forging ahead.

"We won't necessarily wait to write the history . . . from the beginning to the end of these affairs," says Assistant Attorney General Michael Chertoff, who heads the government's corporate crime fighting effort. "When we get to a point at which we have a case to bring that's a significant case, we bring the case. But we do so in a manner that is professional, and we make sure that we have a case that we can sustain in court."

Without remarking on specific cases, Justice Department spokesman Bryan Sierra warns against comparing cases, because each has a different level of complexity. But former prosecutors say they are not surprised that the relatively simple scandal at WorldCom–a misrepresentation of expenses that inflated profit by $7.2 billion–yielded criminal charges against top officers just weeks after coming to light this spring, while the mind-numbingly complex financial morass at Enron has been slower going. Even in cases such as ImClone Systems, where Justice has brought charges–as it did weeks ago against former chief executive Samuel Waksal, accused of insider trading–much remains unexplored. For example, last week a congressional committee urged the Justice Department to expand its probe of homemaking maven Martha Stewart to cover possible perjury in her lawyer's written responses to lawmakers about her well-timed ImClone stock trades.

In the WorldCom case, prosecutors have made clear that they plan to expand their accounting fraud case beyond the three company executives they've charged and the two others they've named as unindicted coconspirators. They asked a federal magistrate to give them until early October to try to reach a plea agreement with former WorldCom comptroller David Myers, a clear sign that they are seeking to amass evidence against higher-ups. It remains to be seen whether the evidence will reach as high as ousted chief executive Bernard J. Ebbers, who has not yet been named by prosecutors, or whether the trail will stop with former Chief Financial Officer Scott Sullivan, who already has been charged.

It has taken longer for the 10 prosecutors and 30 FBI agents working full time on Enron to build a case against ex-officials of the energy-trading giant. A first break came with last month's guilty plea by Michael Kopper, a Fastow subordinate who admits to having profited from a series of complex financial transactions that concealed Enron's peril. Getting Kopper to turn was a key victory because it gives prosecutors a potential witness against Fastow and perhaps others. "What you're looking to do is get a narrator to explain what happened inside," says former federal prosecutor Robert Cleary. "You have thousands and thousands of documents to corroborate what the individual says, but cases built on paper, for which you don't have an insider explaining what it all means, are very difficult to bring before a jury."

Grabbing the gains. Kop- per's plea also gave prosecutors another means to squeeze Fastow. In court documents laying out the case against Kopper, the Justice Department sought forfeiture of all assets linked to the proceeds of the alleged illegal transactions, including $23 million in bank and brokerage accounts and real estate owned by Fastow and his family members. Among the property is the new home that Fastow and his wife, Lea, were building in River Oaks, reported by the Houston Chronicle's real-estate column to be on the market for $4.2 million. Court proceedings regarding the asset forfeiture have been filed under seal, and neither the Justice Department nor Fastow will comment. Any assets that the government obtains will be added to $12 million Kopper has agreed to surrender, to be placed in a court registry awaiting a Securities and Exchange Commission plan to distribute the funds to Enron shareholders.

The asset forfeiture move certainly caught the attention of lawyers defending other ex-corporate officers. "The whole notion of the ability to seize assets prior to trial is foreign to our tradition of law," says Michael Ramsey of Houston, who represents former Enron CEO Ken Lay. "It got into the law in the first place in narcotics enforcement, when the political apparatus decided that any stick's good enough to kill a snake." Ramsey says he isn't concerned that Lay–whose name was notably absent from the Kopper court filings–will face similar action, however.

Since many of the prosecutors working on corporate crime are veterans of drug and organized crime cases, it's not surprising that they'd reach for their accustomed legal tools. Some observers have speculated that the complex frauds might eventually yield racketeering charges, as did 1980s financial scandals.

Their story. Prosecutors face another obstacle; even under the strengthened corporate crime law signed by President Bush on July 30, executives have ample defenses. For example, Ramsey says he has met twice with prosecutors to discuss Lay's activities. They focused not on Enron's arcane financial dealings but on Lay's sale of Enron stock throughout 2001. In fact, prosecutors will have a hard time overcoming Lay's defense that his trades were an attempt to meet up to $90 million in bank and brokerage obligations he faced–loans that were secured with rapidly declining Enron stock. "The urban legend is that Ken Lay was bailing out of Enron," Ramsey argues. "The truth was he stayed in as long and as heavily exposed as he could under the circumstances."

Expect defendants also to argue that corporate problems were due not to individual wrongdoing but to a market gone awry. "There is a fair bit of political posturing in these matters, with decisions being made for public relations purposes and not for criminal justice purposes," says defense lawyer Irvin Nathan. "Blaming individuals for market conditions tends to mask much more serious problems with the economy." But the Justice Department, for now, feels it has a mandate to hold corporate officials responsible. "Some have called us too aggressive," says Chertoff, "but those voices seem to be growing fainter as ever more egregious business practices are exposed to public scrutiny."

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