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Sleepless in Houston
Ebbers could now spend the rest of his life in prison. Ken Lay & Co. should be nervous.
March 15, 2005: 6:39 PM EST
By Krysten Crawford, CNN/Money staff writer
Ebbers tried to pin the blame for WorldCom's collapse on his onetime deputy. It didn't work.
Ebbers tried to pin the blame for WorldCom's collapse on his onetime deputy. It didn't work.
Andrew Fastow, the former Enron CFO, is expected to testify at next year's trial of former Enron CEO Kenneth Lay.
Andrew Fastow, the former Enron CFO, is expected to testify at next year's trial of former Enron CEO Kenneth Lay.

NEW YORK (CNN/Money) - It could be a restless night for Kenneth Lay, Richard Scrushy and Dennis Kozlowski.

Bernard Ebbers could spend the rest of his life in prison following his conviction Tuesday on nine felony counts related to an $11 billion accounting fraud that led WorldCom, Inc. to file in 2002 what remains the largest bankruptcy in U.S. history.

For ex-Enron chairman Lay, HealthSouth founder Scrushy and former Tyco International CEO Kozlowski, the downfall of one of their peers has to be chilling, legal experts said Tuesday.

"Clearly any one of these individuals is looking at these trials and this verdict and thinking 'My god. What is going to happen to me?'" said Stanley Twardy, a former U.S. attorney in Connecticut who is now a partner in Day, Berry & Howard.

Scrushy and Kozlowski are now on trial for allegedly defrauding investors at their respective companies. Lay's trial is set to begin early next year. Like Ebbers, all three say they are innocent of the charges against them.

"I think each of them feels in their own minds that their story is different from Ebbers' story and that their result will be different," continued Twardy. "But (Ebbers' guilt) has to be in the back of their minds."

No two cases are alike

To be sure, legal experts caution that it's useless to draw broad conclusions about what the Ebbers case and other prosecutions signal for the indicted executives now on trial or headed for trial. It's not just that the facts of each case differ. They say too many other factors -- including the courts hearing a case, the jurors selected and the lawyers involved -- can affect the outcome.

So far the government track record from its three year-old crackdown on corporate chicanery has included wins, losses and a few mistrials. At this point only a handful of top executives accused of greed or cooking the company books have gone to prison.

The Ebbers verdict is the biggest victory yet for the government.

Even though the cases differ, the outcome in U.S. v. Ebbers does offer some guidance, for defense lawyers and prosecutors alike, about the courtroom strategies that could work and those that clearly won't.

The verdict "sends a message to CEOs that if you're going to defend against fraud cases with the 'ostrich-with-its-head-in-the-sand' defense, the jury is going to slam the door on you," said Orin Snyder, a former federal prosecutor now a partner at Gibson, Dunn & Crutcher in New York.

That message is likely to impact the executives facing prison time differently. Kozlowski and his onetime CFO, Mark Swartz, are accused of bilking Tyco out of $600 million and using the money to fund their lavish lifestyles. Kozlowski and Swartz deny that they did anything wrong, but they don't argue that they were unaware of any alleged fraud. Their defense centers instead on the argument that their actions while at Tyco's helm were approved by the company's board of directors.

Their second trial began in January and continues in New York state court.

Lay, on the other hand, has adopted a defense strategy that is similar to that of Ebbers. Lay insists he knew nothing of the fraud that brought down Enron, whose late 2001 bankruptcy was the largest in history until WorldCom imploded several months later. The Houston energy giant's downfall was also the first of many scandals to hit corporate America. Others followed at Tyco. Adelphia Communications, Global Crossing and HealthSouth.

"Clearly, if I am Ken Lay and I am saying that I didn't know what was going on (at Enron), I have to wonder whether that's going to fly" in light of Ebbers' conviction, said Twardy.

The CFO as key witness

Lay faces a second problem, legal experts said: Prosecutors didn't have a smoking gun with which to convict Ebbers and relied instead on testimony by former WorldCom chief financial officer Scott Sullivan.

Similarly, Enron prosecutors are relying heavily on evidence provided by former Enron CFO Andrew Fastow. Last year Fastow negotiated a plea deal in which he agreed to cooperate with prosecutors in exchange for a 10-year prison term. Prosecutors indicted Lay soon after Fastow began cooperating.

WorldCom's Sullivan, who is also going to prison for his role, pleaded guilty and agreed to testify against Ebbers in the hopes of receiving a lighter sentence. The case came down to whether the jury believed Sullivan or Ebbers, who took the stand in his own defense and whose lawyers tried hard to discredit Sullivan. They said Sullivan masterminded WorldCom's fuzzy accounting without Ebbers' knowledge.

The defense strategy didn't work and that does not bode well for Lay in his looming showdown with Fastow.

Legal experts have said that Lay and his team must discredit Fastow in order to beat the charges against him.

The Ebbers verdict suggests that might not be so easy. Sullivan, after all, was hardly a pristine witness: He admitted on the stand that he lied to analysts and the company board about WorldCom's numbers. Sullivan also acknowledged past recreational drug use.

"Ebbers really had a shot (at an acquittal) because Scott Sullivan was the only real witness and he had such an obvious motive to lie (on the stand)," said one legal expert, who requested anonymity. "Despite that, Ebbers was convicted."

Don't expect Lay, however, to abandon his 'hear-no-evil-see-no-evil' strategy in light of Ebbers' conviction, said Twardy, the former U.S. Attorney.

"Once you start down a certain road, it's hard" to change tactics, he said. "But you can refine it."  Top of page


Bernard J. Ebbers
Corporate Scandals
Crime, Law and Justice
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