Three trials involving top executives accused of fraud or obstructing justice got under way on Monday in cases that could set the tone for possible prosecution in the spate of financial scandals that have swept Wall Street and corporate America in recent years.
Jury selection began in Manhattan Supreme Court in the trial of former Tyco International Ltd. executives Dennis Kozlowski and Mark Swartz, who stand accused of looting the conglomerate of $600 million to finance their lavish lifestyles.
Just blocks away, jury selection began in the trial of former Credit Suisse First Boston investment banker Frank Quattrone, who is accused of interfering with probes of his high-flying stock-offering business.
And in federal court in Harrisburg, Pennsylvania, opening arguments in the trial of Franklin Brown, the former chief counsel of Rite Aid Corp. , began. The trial involves one of the largest corporate fraud scandals in U.S. history.
The two Manhattan trials could set the tone for cases of corporate malfeasance such as Enron Corp. and Adelphia Communications, which are expected to follow, though prosecution is far from assured in either trial.
Robert Mintz, a former federal prosecutor and a partner with McCarter & English, said if the prosecution of Kozlowski and Quattrone fail, it will send a strong message to other executives caught up in corporate scandals to consider going to trial rather than work out a plea.
“Since these are the first two major corporate executives to take the government on at trial in the post-Enron era, it’s critically important that the government emerge at the end of the day with a victory,” Mintz said.
Manhattan Supreme Court Justice Michael Obus told potential jurors they must concentrate on the Tyco case, not think about the wave of U.S. corporate scandals.
“We are not here to send a message,” Obus said. “It is not a case of Enron or WorldCom or any other company you may have heard about. It is not an evaluation of the New York Stock Exchange or how much corporate executives should be paid. What you need to do is listen.”
The prosecution of Brown, 75, could be easier. Four former Rite Aid executives, including the chief executive and chief financial officer, already have pleaded guilty to criminal conspiracy in the scandal. A fifth ex-Rite Aid executive pleaded guilty to a charge of failing to report a felony.
All five former executives will be called to testify. Brown faces 35 counts contained in a federal grand jury indictment that says he helped create the false impression that Rite Aid was profitable in the late 1990s. In the end, the retailer said it overstated profits by $1.6 billion.
The trial of Kozlowski and Swartz will focus on lavish spending, handsomely paid subordinates and sleepy watchdogs.
The heart of the case centers on charges Kozlowski and Swartz illegally tapped millions of dollars in company funds to buy mansions, yachts, Harry Winston jewelry, paintings and an extravagant 40th birthday party for Kozlowski’s wife in Italy.
Dating to the 1980s, Tyco loaned money to key executives to pay taxes on vested restricted stock. The indictment against Kozlowski and Swartz alleges they caused the loans to be forgiven without the board’s knowledge.
The two men are being prosecuted under a racketeering statute usually reserved for hard-core organized crime. Their lawyers say prosecutors have attempted “to distort and expand the reach of criminal law” to cover what is really a dispute over the administration of employee loan programs.
Kozlowski avoided reporters’ questions upon his arrival at the court, saying only, “We’re ready for it.”
STAR QUATTRONE ON TRIAL
Meanwhile, Quattrone, who was one of the first bankers to see the coming technology bonanza of the 1990s, is charged with obstruction of justice and witness tampering.
Prosecutors say the former Wall Street superstar, who in one year may have pocketed as much as $100 million in salary and bonus, interfered with a federal investigation of hot stock offerings by forwarding an e-mail directing staff to destroy documents subpoenaed by a grand jury and the Securities and Exchange Commission.
Quattrone, who resigned from CSFB in March, has hired high-powered attorney John Keker, who will argue nothing shows that his client saw subpoenas before he forwarded the e-mail.
Though he could face a prison term of 25 years if convicted of all charges, in reality he would likely serve far less time if convicted, which many outside experts say is far from sure.
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