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News > Newsmakers
The return of the $6,000 shower curtain
A six-month lull in corporate fraud trials ends soon. Ex-Tyco, WorldCom, HealthSouth execs on deck.
December 27, 2004: 2:20 PM EST
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - The last six months have been relatively quiet in the world of corporate scandals. Only Martha Stewart, who on Monday marked the third anniversary of the stock sale that landed her behind bars, has been dominating headlines.

That's about to change.

Far from being over, the sensational scandals that first swept corporate America when Enron Corp. imploded in late 2001 are still deepening.

"Although in 2004 we saw the Rigases (of Adelphia Communications), Martha Stewart and Frank Quattrone (the former Silicon Valley investment banker) get convicted, the largest number of high-profile executives on trial will be in 2005," said Jacob Frenkel, a former federal prosecutor and SEC enforcement lawyer who is now in private practice.

First up is Richard Scrushy, the former CEO of HealthSouth Corporation. His trial on 58 criminal counts that grew out of a $2.7 billion accounting fraud at the healthcare provider he founded is due to start Jan. 5 in federal court in Alabama.

Nearly two weeks later, on Jan. 18, two more blockbuster trials are due to start: Ex-WorldCom CEO Bernard Ebbers Jr. will face charges in New York federal court stemming from an $11 billion accounting fraud that bankrupted the telecommunications giant now known as MCI.

On the same day and just a few blocks away, former Tyco International honchos Dennis Kozlowski and Mark Swartz are due to answer for the second time criminal changes that they looted $600 million from the company. Their first trial, a sensational showdown that featured a $6,000 shower curtain and a vodka-spouting statue of David at a lavish Italian birthday party, ended this spring in a mistrial.

All four executives headed to trial have pleaded not guilty and deny they did anything wrong. If convicted on all counts against them, they face prison terms ranging from 10 years for Ebbers to 450 years for Scrushy.

Climbing the corporate ladder

Many more await their day in court. They include former Enron chiefs Kenneth Lay, Jeffery Skilling and Richard Causey. Ex-Adelphia chief operations officer Michael Rigas is also due to be tried again. While his brother and father were convicted in July of fraud and are due to be sentenced, the prosecution of Michael Rigas ended in a mistrial.

Frenkel, a partner in Rockville, Maryland's Shulman, Rogers, Gandal, Pordy & Ecker, calls 2004 the "year of the plea." For while Stewart, Quattrone and a handful of executives went on trial, many more once high-flying corporate suits cut deals with prosecutors whereby they agreed to plead guilty and to cooperate with ongoing investigations in exchange for lighter sentences.

The practice, which prosecutors have long used, is aimed at pressuring underlings to snitch on the higher-ups who prosecutors want most to put behind bars. Perhaps the best-known example of a plea deal in 2004 involved a husband-and-wife team caught up in Enron's collapse.

Andrew Fastow, Enron's former chief financial officer, agreed to a 10-year prison term and to cooperate with investigators on the condition that his incarceration would not overlap with that of his wife Lea, Enron's former assistant treasurer, who also brokered a deal with prosecutors. The Fastows said they wanted one parent at home to raise their children.

The on-again, off-again plea deal ended when Lea Fastow pleaded guilty to a misdemeanor tax charge in May and began serving two months later a one-year sentence at a Houston federal lockup.

"In the last two years, the government has painstakingly climbed ladders, gotten different people along the way to plead guilty in order to go after someone at the higher rung," said Frenkel. "We're now at the top of the ladder."

The biggest battles loom

Legal experts have praised prosecutors for a solid, if not unblemished, track record in 2004. But they arguably face their toughest battles yet.

Two of this year's biggest trials -- against Martha Stewart and her former Merrill Lynch stockbroker and against Quattrone, the former Credit Suisse First Boston financier -- did not involve charges of fraud. Instead, prosecutors brought narrow cases centered on easier-to-prove allegations of obstruction of justice.

Stewart, the founder and former CEO of Martha Stewart Living Omnimedia (Research), was found guilty of trying to hinder a government probe into her well-timed sale of ImClone Systems (Research) stock on Dec. 27, 2001. Quattrone was found guilty of obstructing justice when he sent an e-mail to underlings reminding them to clean up their files while investigators were looking into allegations that CSFB broke the law by giving favorite clients shares of some of the late 1990s hottest initial public offerings.

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Stewart is now serving a 10-month sentence, including a five-month prison term, after being convicted in March. Quattrone has been sentenced to 18 months behind bars but is free on bail pending the outcome of his appeal.

Prosecutors, predicted Frenkel, "are not going to have an easy time" convincing a jury that Ebbers or Scrushy cooked the books at their respective companies. He said the cases are far more sophisticated and success for the prosecutors will hinge on their ability to simplify complex accounting principles.

He noted too that Scrushy et al. have lined up some of the best legal talent money can buy. Ebbers' lead defense lawyer is Reid Weingarten, a partner in Steptoe & Johnson who already has one big victory under his belt: former Tyco general counsel Mark Belnick, who was acquitted this summer of financial misconduct.

"Prosecutors are also about to go up against an unprecedented level of firepower," said Frenkel.  Top of page

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