Bush to seek jail for CEOs
Speech seen as effort to distance president from critics and restore investor confidence.
July 8, 2002: 6:22 PM EDT
By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - President Bush could tell Wall Street Tuesday that he will seek prison time for corporate executives who mislead investors -- even after he again answered questions about his own business activities.

Bush's speech comes amid a crescendo of worry about the reliability of corporate accounting and presumed malfeasance by top executives, worry that has sunk U.S. stock markets and could hamper the country's nascent economic recovery.

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"A key to our economic development is consumer and investor confidence in the markets and in the integrity of Corporate America, and right now that confidence has been shaken," Bush said in a press conference. "I will outline tough new laws to punish abuses, restore investor confidence and protect the pensions of American workers."

Even as Bush and members of his administration have toughened their rhetoric about corporate responsibility, he has faced questions about his sale of stock and activities associated with Harken Energy Corp. (HEC: Research, Estimates) more than a decade ago.

Meanwhile, oil field drilling company Halliburton (HAL: Research, Estimates) is being investigated by the Securities and Exchange Commission for its accounting practices under the management of Vice President Dick Cheney, who was Halliburton's CEO from 1995 to 2000.

Bush and Cheney have repeatedly denied any wrongdoing in these matters, which Bush described as old news. He accused the Democrats of using the issues for gain in a congressional election year.

"This is recycled stuff," Bush said. "It's old-style politics. I guess that's the way it's going to be."

Still, Democrats have used these charges to further paint the Bush administration as a friend of big business -- an image that had already been enhanced by the news that bankrupt energy trader Enron Corp. was one of Bush's biggest campaign contributors.

"[Bush and his staff] are clearly playing defense on this issue because events got ahead of them," said Robert Litan, vice president and director of economic studies at the Brookings Institution, who recently wrote a study called "The Crisis in Corporate Disclosure." "I don't know whether they can get the momentum back. At this point, they're in damage control mode."

As evidence of the seriousness of the situation to politicians and the markets, the House Committee on Financial Services held a hearing to examine the recent accounting scandal at WorldCom Group (WCOME: Research, Estimates) and the Senate began to debate a bill sponsored by Paul Sarbanes, D-Md., to address problems in corporate accounting and governance.

Meanwhile, U.S. stock markets fell in response to news of accounting irregularities at Merck & Co. (MRK: Research, Estimates), the latest on a long list of bad news from Corporate America.

Bush is widely expected to reiterate proposals for corporate governance that he and other members of his administration already have made, including a requirement that executives certify their financial statements are correct and be prosecuted criminally if they are misleading.

According to a Reuters report, Bush could ask for tougher laws to increase civil and criminal penalties -- including jail time -- for corporate fraud. He could also ask for criminal penalties for misleading accounting practices, abuses that are currently subject only to civil penalties.

Bush also could call for giving the Securities and Exchange Commission the authority to ban corporate executives from serving on corporate boards and seize money earned through fraudulent means, an official told CNN.

In his press conference Monday, Bush said only that he would ask for a stronger SEC with more investigators and a bigger budget -- something his rival in the 2000 election, Ralph Nader, has recently called for.

What will restore confidence?

But some observers have worried that Bush's proposals won't go far enough to restore confidence.

"I'm all with the president in getting after the bad apples," Sarbanes told CNN anchor Paula Zahn. "But at the same time, you also have to make changes in the system to give us some assurance that these things won't [happen] again."

Sarbanes' bill, approved 17-4 last week by a Senate review committee, would establish an independent accounting oversight board, require CEOs to certify financial statements and keep executives who break the rules from serving on other corporate boards.

Bush has supported measures in a similar bill by Rep. Michael Oxley, R-Ohio, that was approved and sent to the Senate in April, while Democrats prefer Sarbanes' bill, which they describe as tougher.

And a series of amendments, including some that would set tougher criminal penalties for fraud and misleading accounting, will be proposed to Sarbanes' bill during debate, which will likely spill into next week, according to Sarbanes spokesman Jesse Jacobs.

Still, even with tougher criminal penalties, it could be a long time before CEOs are carted off to jail.

"I've seen some of those cases tried from time to time, and they take many months -- often years -- to investigate," said attorney John Olson, a partner with Washington law firm Gibson, Dunn & Crutcher, who serves as chairman of the American Bar Association's Corporate Governance Committee.

Olson said the real solution was not making more laws but giving resources to prosecutors to help them enforce the laws.

"They could, I suppose, put in some mandatory penalties that would up the ante," Olson said. "But increasing penalties does not necessarily increase prosecutions. It may make them harder -- tougher penalties could make judges more cautious and raise more grounds for appeal."

Charles Elson, director and professor of law at the Center for Corporate Governance at the University of Delaware, told CNNfn's CNNmoney Morning program that he hoped Bush would call for a majority of independent directors on corporate boards, oversight and reform of the accounting industry, and criminal prosecution of executives.

"That would go an awful long way to restoring confidence," Elson said.

But Bush has not said he would discuss any of those points and gave few hints in his press conference Monday of the details of his Tuesday speech. White House officials could not be reached for comment.

Pitt under fire

The SEC has proposed its own set of reforms, but Democrats have said its proposals are too little, too late, and they increased the pressure on the agency's chairman, Harvey Pitt, who was appointed by Bush.

Sens. Tom Daschle, D-S.D., and John McCain, R-Ariz., called on Sunday and Monday, respectively, for Pitt's resignation, calls Bush rejected Monday.

"I support Harvey Pitt," said Bush, who noted that Pitt was unanimously approved by the Senate. "Every senator said 'aye' on Harvey Pitt, meaning they thought he was the right man for job. I still think he is."

Pitt has been criticized for his prior employment by lobbyists for the very accounting industry he now regulates, and critics have said he's moved too slowly to respond to accounting scandals surrounding Enron, Global Crossing, WorldCom and more.

Somewhat surprisingly, Democratic Senator Sarbanes told CNN he wanted to give Pitt a chance.

"I think Chairman Pitt and the SEC are trying to catch up and get ahead of the curve," he said. They've instituted a number of important measures."

Bush, Pitt and other administration officials have made several public declarations of outrage in the wake of the revelation last month by WorldCom that it had failed to report $3.8 billion in expenses.

The WorldCom news weighed heavily on stock prices and led for more calls for reform of corporate governance and corporate accounting. WorldCom (WCOME: Research, Estimates) is the subject of investigations by Congress, the Justice Department and the SEC.

Harken dogs Bush

Daschle also asked this weekend for the White House to release records of the SEC's investigation into Bush's handling of stock in Harken Energy Corp.

Bush sold stock in Harken in 1990, when he was on the company's board, two months before the company disclosed a huge loss. Bush said this charge already has been investigated and that the matter was dropped by the SEC.

And Democrats recently have reminded the press of an accounting scheme used by Harken in 1989, when Bush was on the company's audit committee and board of directors, in which Harken executives used money borrowed from Harken to buy a Harken subsidiary and artificially boost Harken's cash flow.

The SEC forced Harken to adjust its books but found that Bush had done nothing wrong.

"In the corporate world, sometimes things aren't exactly black and white when it comes to accounting procedures," Bush said Monday. "The SEC's job is to determine whether or not the decision by auditors was the appropriate decision."

Harken did not return calls for comment.  Top of page