By Clifton Leaf Additional Reporting by Doris Burke, Ellen Florian, Patricia Neering, and Nicholas Varchaver

(FORTUNE Magazine) – Arthur Levitt, the tough-talking former chairman of the Securities and Exchange Commission, spoke of a "multitude of villains." Red-faced Congressmen hurled insults, going so far as to compare the figures at the center of the Enron debacle unfavorably to carnival hucksters. The Treasury Secretary presided over a high-level working group aimed at punishing negligent CEOs and directors. Legislators from all but a handful of states threatened to sue the firm that bollixed up the auditing, Arthur Andersen. There was as much handwringing, proselytizing, and bloviating in front of the witness stand as there was shredding behind it.

It took a late-night comedian, though, to zero in on the central mystery of this latest corporate shame. After a parade of executives from Enron and Arthur Andersen flashed on the television monitor, Jon Stewart, anchor of The Daily Show, turned to the camera and shouted, "Why aren't all of you in jail? And not like white-guy jail--jail jail. With people by the weight room going, 'Mmmmm.'"

It was a pitch-perfect question. And, sadly, one that was sure to get a laugh.

Not since the savings-and-loan scandal a decade ago have high crimes in the boardroom provided such rich television entertainment. But that's not for any lack of malfeasance. Before Enronitis inflamed the public, gigantic white-collar swindles were rolling through the business world and the legal system with their customary regularity. And though they displayed the full creative range of executive thievery, they had one thing in common: Hardly anyone ever went to prison.

Regulators alleged that divisional managers at investment firm Credit Suisse First Boston participated in a "pervasive" scheme to siphon tens of millions of dollars of their customers' trading profits during the Internet boom of 1999 and early 2000 by demanding excessive trading fees. (For one 1999 quarter the backdoor bonuses amounted to as much as a fifth of the firm's total commissions.) Those were the facts, as outlined by the SEC and the National Association of Securities Dealers in a high-profile news conference earlier this year. But the January news conference wasn't to announce an indictment. It was to herald a settlement, in which CSFB neither admitted nor denied wrongdoing. Sure, the SEC concluded that the investment bank had failed to observe "high standards of commercial honor," and the company paid $100 million in fines and "disgorgement," and CSFB itself punished 19 of its employees with fines ranging from $250,000 to $500,000. But whatever may or may not have happened, no one was charged with a crime. The U.S. Attorney's office in Manhattan dropped its investigation when the case was settled. Nobody, in other words, is headed for the hoosegow.

A month earlier drugmaker ICN Pharmaceuticals actually pleaded guilty to one count of criminal fraud for intentionally misleading investors--over many years, it now seems--about the FDA approval status of its flagship drug, ribavirin. The result of a five-year grand jury investigation? A $5.6 million fine and the company's accession to a three-year "probationary" period. Prosecutors said that not only had the company deceived investors, but its chairman, Milan Panic, had also made more than a million dollars off the fraud as he hurriedly sold shares. He was never charged with insider trading or any other criminal act. The SEC is taking a firm stand, though, "seeking to bar Mr. Panic from serving as a director or officer of any publicly traded company." Tough luck.

And who can forget those other powerhouse scandals, Sunbeam and Waste Management? The notorious Al "Chainsaw" Dunlap, accused of zealously fabricating Sunbeam's financial statements when he was chief executive, is facing only civil, not criminal, charges. The SEC charged that Dunlap and his minions made use of every accounting fraud in the book, from "channel stuffing" to "cookie jar reserves." The case is now in the discovery phase of trial and likely to be settled; he has denied wrongdoing. (Earlier Chainsaw rid himself of a class-action shareholder suit for $15 million, without admitting culpability.) Whatever the current trial's outcome, Dunlap will still come out well ahead. Sunbeam, now under bankruptcy protection, gave him $12.7 million in stock and salary during 1998 alone. And if worse comes to worst, he can always tap the stash he got from the sale of the disemboweled Scott Paper to Kimberly-Clark, which by Dunlap's own estimate netted him a $100 million bonanza.

Sunbeam investors, naturally, didn't fare as well. When the fraud was discovered internally, the company was forced to restate its earnings, slashing half the reported profits from fiscal 1997. After that embarrassment, Sunbeam shares fell from $52 to $7 in just six months--a loss of $3.8 billion in market cap. Sound familiar?

The auditor in that case, you'll recall, was Arthur Andersen, which paid $110 million to settle a civil action. According to an SEC release in May, an Andersen partner authorized unqualified audit opinions even though "he was aware of many of the company's accounting improprieties and disclosure failures." The opinions were false and misleading. But nobody is going to jail.

At Waste Management, yet another Andersen client, income reported over six years was overstated by $1.4 billion. Andersen coughed up $220 million to shareholders to wipe its hands clean. The auditor, agreeing to the SEC's first antifraud injunction against a major firm in more than 20 years, also paid a $7 million fine to close the complaint. Three partners were assessed fines, ranging from $30,000 to $50,000, as well. (You guessed it. Not even home detention.) Concedes one former regulator familiar with the case: "Senior people at Andersen got off when we felt we had the goods." Andersen did not respond to a request for comment.

The list goes on--from phony bookkeeping at the former Bankers Trust (now part of Deutsche Bank) to allegations of insider trading by a former Citigroup vice president. One employee of California tech firm nVidia admitted that he cleared nearly half a million dollars in a single day in March 2000 from an illegal insider tip. He pleaded guilty to criminal charges, paid fines, and got a 12-month grounding at home.

While none of those misbehaviors may rise to Enronian proportions, at least in terms of salacious detail, taken en masse they say something far more distressing. The double standard in criminal justice in this country is starker and more embedded than many realize. Bob Dylan was right: Steal a little, and they put you in jail. Steal a lot, and you're likely to walk away with a lecture and a court-ordered promise not to do it again.

Far beyond the pure social inequity--and that would be bad enough, we admit--is a very real dollar-and-cents cost, a doozy of a recurring charge that ripples through the financial markets. As the Enron case makes abundantly clear, white-collar fraud is not a victimless crime. In this age of the 401(k), when the retirement dreams of middle-class America are tied to the integrity of the stock market, crooks in the corner office are everybody's problem. And the problem will not go away until white-collar thieves face a consequence they're actually scared of: time in jail.

The U.S. regulatory and judiciary systems, however, do little if anything to deter the most damaging Wall Street crimes. Interviews with some six dozen current and former federal prosecutors, regulatory officials, defense lawyers, criminologists, and high-ranking corporate executives paint a disturbing picture. The already stretched "white-collar" task forces of the FBI focus on wide-ranging schemes like Internet, insurance, and Medicare fraud, abandoning traditional securities and accounting offenses to the SEC. Federal securities regulators, while determined and well trained, are so understaffed that they often have to let good cases slip away. Prosecutors leave scores of would-be criminal cases referred by the SEC in the dustbin, declining to prosecute more than half of what comes their way. State regulators, with a few notable exceptions, shy away from the complicated stuff. So-called self-regulatory organizations like the National Association of Securities Dealers are relatively toothless; trade groups like the American Institute of Certified Public Accountants stubbornly protect their own. And perhaps worst of all, corporate chiefs often wink at (or nod off to) overly aggressive tactics that speed along the margins of the law.

Let's start with the numbers. Wall Street, after all, is about numbers, about playing the percentages. And that may be the very heart of the problem. Though securities officials like to brag about their enforcement records, few in America's top-floor suites and corporate boardrooms fear the local sheriff. They know the odds of getting caught.

The U.S. Attorneys' Annual Statistical Report is the official reckoning of the Department of Justice. For the year 2000, the most recent statistics available, federal prosecutors say they charged 8,766 defendants with what they term white-collar crimes, convicting 6,876, or an impressive 78% of the cases brought. Not bad. Of that number, about 4,000 were sentenced to prison--nearly all of them for less than three years. (The average time served, experts say, is closer to 16 months.)

But that 4,000 number isn't what you probably think it is. The Justice Department uses the white-collar appellation for virtually every kind of fraud, says Henry Pontell, a leading criminologist at the University of California at Irvine, and co-author of Big-Money Crime: Fraud and Politics in the Savings and Loan Crisis. "I've seen welfare frauds labeled as white-collar crimes," he says. Digging deeper into the Justice Department's 2000 statistics, we find that only 226 of the cases involved securities or commodities fraud.

And guess what: Even those are rarely the highfliers, says Kip Schlegel, chairman of the department of criminal justice at Indiana University, who wrote a study on Wall Street lawbreaking for the Justice Department's research wing. Many of the government's largest sting operations come from busting up cross-state Ponzi schemes, "affinity" investment scams (which prey on the elderly or on particular ethnic or religious groups), and penny-stock boiler rooms, like the infamous Stratton Oakmont and Sterling Foster. They are bad seeds, certainly. But let's not kid ourselves: They are not corporate-officer types or high-level Wall Street traders and bankers--what we might call starched-collar criminals. "The criminal sanction is generally reserved for the losers," says Schlegel, "the scamsters, the low-rent crimes."

Statistics from the Federal Bureau of Prisons, up to date as of October 2001, make it even clearer how few white-collar criminals are behind bars. Of a total federal inmate population of 156,238, prison authorities say only 1,021 fit the description--which includes everyone from insur-ance schemers to bankruptcy fraudsters, counterfeiters to election-law tamperers to postal thieves. Out of those 1,000 or so, well more than half are held at minimum-security levels--often privately managed "Club Feds" that are about two steps down the comfort ladder from Motel 6.

And how many of them are the starched-collar crooks who commit securities fraud? The Bureau of Prisons can't say precisely. The Department of Justice won't say either--but the answer lies in its database.

Susan Long, a professor of quantitative methods at the school of management at Syracuse University, co-founded a Web data clearinghouse called TRAC, which has been tracking prosecutor referrals from virtually every federal agency for more than a decade. Using a barrage of Freedom of Information Act lawsuits, TRAC has been able to gather data buried in the Justice Department's own computer files (minus the individual case numbers that might be used to identify defendants). And the data, which follow each matter from referral to the prison steps, tell a story the Justice Department doesn't want you to know.

In the full ten years from 1992 to 2001, according to TRAC data, SEC enforcement attorneys referred 609 cases to the Justice Department for possible criminal charges. Of that number, U.S. Attorneys decided what to do on about 525 of the cases--declining to prosecute just over 64% of them. Of those they did press forward, the feds obtained guilty verdicts in a respectable 76%. But even then, some 40% of the convicted starched-collars didn't spend a day in jail. In case you're wondering, here's the magic number that did: 87.

Five-point type is small print, so tiny that almost everyone who remembers the Bay of Pigs or the fall of Saigon will need bifocals to read it. For those who love pulp fiction or the crime blotters in their town weeklies, however, there is no better place to look than in the small print of the Wall Street Journal's B section. Once a month, buried in the thick folds of newsprint, are bullet reports of the NASD's disciplinary actions. February's disclosures about alleged misbehavior, for example, range from the unseemly to the lurid--from an Ohio bond firm accused of systematically overcharging customers and fraudulently marking up trades to a California broker who deposited a client's $143,000 check in his own account. Two senior VPs of a Pittsburgh firm, say NASD officials, cashed out of stock, thanks to timely inside information they received about an upcoming loss; a Dallas broker reportedly converted someone's 401(k) rollover check to his personal use.

In all, the group's regulatory arm received 23,753 customer complaints against its registered reps between the years 1997 and 2000. After often extensive investigations, the NASD barred "for life" during this period 1,662 members and suspended another 1,000 or so for violations of its rules or of laws on the federal books. But despite its impressive 117-page Sanction Guidelines, the NASD can't do much of anything to its miscreant broker-dealers other than throw them out of the club. It has no statutory right to file civil actions against rule breakers, it has no subpoena power, and from the looks of things it can't even get the bums to return phone calls. Too often the disciplinary write-ups conclude with a boilerplate "failed to respond to NASD requests for information."

"That's a good thing when they default," says Barry Goldsmith, executive vice president for enforcement at NASD Regulation. "It gives us the ability to get the wrongdoers out quickly to prevent them from doing more harm."

Goldsmith won't say how many cases the NASD passes on to the SEC or to criminal prosecutors for further investigation. But he does acknowledge that the securities group refers a couple of hundred suspected insider-trading cases to its higher-ups in the regulatory chain.

Thus fails the first line of defense against white-collar crime: self-policing. The situation is worse, if anything, among accountants than it is among securities dealers, says John C. Coffee Jr., a Columbia Law School professor and a leading authority on securities enforcement issues. At the American Institute of Certified Public Accountants, he says, "no real effort is made to enforce the rules." Except one, apparently. "They have a rule that they do not take action against auditors until all civil litigation has been resolved," Coffee says, "because they don't want their actions to be used against their members in a civil suit." Lynn E. Turner, who until last summer was the SEC's chief accountant and is now a professor at Colorado State University, agrees. "The AICPA," he says, "often failed to discipline members in a timely fashion, if at all. And when it did, its most severe remedy was just to expel the member from the organization."

Al Anderson, senior VP of AICPA, says the criticism is unfounded. "We have been and always will be committed to enforcing the rules," he says.

The next line of defense after the professional associations is the SEC. The central role of this independent regulatory agency is to protect investors in the financial markets by making sure that publicly traded companies play by the rules. With jurisdiction over every constituent in the securities trade, from brokers to mutual funds to accountants to corporate filers, it would seem to be the voice of Oz. But the SEC's power, like that of the Wizard, lies more in persuasion than in punishment. The commission can force companies to comply with securities rules, it can fine them when they don't, it can even charge them in civil court with violating the law. But it can't drag anybody off to prison. To that end, the SEC's enforcement division must work with federal and state prosecutors--a game that often turns into weak cop/bad cop.

Nevertheless, the last commission chairman, Arthur Levitt, did manage to shake the ground with the power he had. For the 1997-2000 period, for instance, attorneys at the agency's enforcement division brought civil actions against 2,989 respondents. That figure includes 487 individual cases of alleged insider trading, 365 for stock manipulation, 343 for violations of laws and rules related to financial disclosure, 196 for contempt of the regulatory agency, and another 94 for fraud against customers. In other words, enough bad stuff to go around. What would make them civil crimes, vs. actual handcuff-and-fingerprint ones? Evidence, says one SEC regional director. "In a civil case you need only a preponderance of evidence that there was an intent to defraud," she says. "In a criminal case you have to prove that intent beyond a reasonable doubt."

When the SEC does find a case that smacks of criminal intent, the commission refers it to a U.S. Attorney. And that is where the second line of defense often breaks down. The SEC has the expertise to sniff out such wrongdoing but not the big stick of prison to wave in front of its targets. The U.S. Attorney's office has the power to order in the SWAT teams but often lacks the expertise--and, quite frankly, the inclination--to deconstruct a complex financial crime. After all, it is busy pursuing drug kingpins and terrorists.

And there is also the key issue of institutional kinship, say an overwhelming number of government authorities. U.S. Attorneys, for example, have kissing-cousin relationships with the agencies they work with most, the FBI and DEA. Prosecutors and investigators often work together from the start and know the elements required on each side to make a case stick. That is hardly true with the SEC and all but a handful of U.S. Attorneys around the country. In candid conversations, current and former regulators cited the lack of warm cooperation between the law-enforcement groups, saying one had no clue about how the other worked.

Thirteen blocks from Wall Street is a different kind of ground zero. Here, in the shadow of the imposing Federalist-style courthouses of lower Manhattan, is a nine-story stone fortress of indeterminate color, somewhere in the unhappy genus of waiting-room beige. As with every federal building these days, there are reminders of the threat of terrorism, but this particular outpost has taken those reminders to the status of a four-bell alarm. To get to the U.S. Attorney's office, a visitor must wind his way through a phalanx of blue police barricades, stop by a kiosk manned by a U.S. marshal, enter a giant white tent with police and metal detectors, and proceed to a bulletproof visitors desk, replete with armed guards. Even if you make it to the third floor, home of the Securities and Commodities Fraud Task Force, Southern District of New York, you'll need an electronic passkey to get in.

This, the office which Rudy Giuliani led to national prominence with his late-1980s busts of junk-bond king Michael Milken, Ivan Boesky, and the Drexel Burnham insider-trading ring, is one of the few outfits in the country that even know how to prosecute complex securities crimes. Or at least one of the few willing to take them on. Over the years it has become the favorite (and at times lone) repository for the SEC's enforcement hit list.

And how many attorneys are in this office to fight the nation's book cookers, insider traders, and other Wall Street thieves? Twenty-five--including three on loan from the SEC. The unit has a fraction of the paralegal and administrative help of even a small private law firm. Assistant U.S. Attorneys do their own copying, and in one recent sting it was Sandy--one of the unit's two secretaries--who did the records analysis that broke the case wide open.

Even this office declines to prosecute more than half the cases referred to it by the SEC. Richard Owens, the newly minted chief of the securities task force and a six-year veteran of the unit, insists that it is not for lack of resources. There are plenty of legitimate reasons, he says, why a prosecutor would choose not to pursue a case--starting with the possibility that there may not have been true criminal intent.

But many federal regulators scoff at such bravado. "We've got too many crooks and not enough cops," says one. "We could fill Riker's Island if we had the resources."

And Owens' office is as good as it gets in this country. In other cities, federal and state prosecutors shun securities cases for all kinds of understandable reasons. They're harder to pull off than almost any other type of case--and the payoff is rarely worth it from the standpoint of local political impact. "The typical state prosecution is for a standard common-law crime," explains Philip A. Feigin, an attorney with Rothgerber Johnson & Lyons in Denver and a former commissioner of the Colorado Securities Division. "An ordinary trial will probably last for five days, it'll have 12 witnesses, involve an act that occurred in one day, and was done by one person." Now hear the pitch coming from a securities regulator thousands of miles away. "Hi. We've never met, but I've got this case I'd like you to take on. The law that was broken is just 158 pages long. It involves only three years of conduct--and the trial should last no more than three months. What do you say?" The prosecutor has eight burglaries or drug cases he could bring in the time it takes to prosecute a single white-collar crime. "It's a completely easy choice," says Feigin.

That easy choice, sadly, has left a glaring logical--and moral--fallacy in the nation's justice system: Suite thugs don't go to jail because street thugs have to. And there's one more thing on which many crime experts are adamant. The double standard makes no sense whatsoever when you consider the damage done by the offense. Sociologist Pontell and his colleagues Kitty Calavita, at U.C. Irvine, and Robert Tillman, at New York's St. John's University, have demonstrated this in a number of compelling academic studies. In one the researchers compared the sentences received by major players (that is, those who stole $100,000 or more) in the savings-and-loan scandal a decade ago with the sentences handed to other types of nonviolent federal offenders. The starched-collar S&L crooks got an average of 36.4 months in the slammer. Those who committed burglary--generally swiping $300 or less--got 55.6 months; car thieves, 38 months; and first-time drug offenders, 64.9 months. Now compare the costs of the two kinds of crime: The losses from all bank robberies in the U.S. in 1992 totaled $35 million, according to the FBI's Uniform Crime Reports. That's about 1% of the estimated cost of Charles Keating's fraud at Lincoln Savings & Loan.

"Of all the factors that lead to corporate crime, none comes close in importance to the role top management plays in tolerating, even shaping, a culture that allows for it," says William Laufer, the director of the Zicklin Center for Business Ethics Research at the Wharton School. Laufer calls it "winking." And with each wink, nod, and nudge-nudge, instructions of a sort are passed down the management chain. Accounting fraud, for example, often starts in this way. "Nobody writes an e-mail that says, 'Gee, I think I'll screw the public today,'" says former regulator Feigin. "There's never been a fraud of passion. These things take years." They breed slowly over time.

So does the impetus to fight them. Enron, of course, has stirred an embarrassed Administration and Congress to action. But it isn't merely Enron that worries legislators and the public--it's another Enron. Every day brings news of one more accounting gas leak that for too long lay undetected. Wariness about Lucent, Rite Aid, Raytheon, Tyco, and a host of other big names has left investors not only rattled but also questioning the very integrity of the financial reporting system.

And with good reason. Two statistics in particular suggest that no small degree of executive misconduct has been brewing in the corporate petri dish. In 1999 and 2000 the SEC demanded 96 restatements of earnings or other financial statements--a figure that was more than in the previous nine years combined. Then, in January, the Federal Deposit Insurance Corp. announced more disturbing news. The number of publicly traded companies declaring bankruptcy shot up to a record 257, a stunning 46% over the prior year's total, which itself had been a record. These companies shunted $259 billion in assets into protective custody--that is, away from shareholders. And a record 45 of these losers were biggies, companies with assets greater than $1 billion. That might all seem normal in a time of burst bubbles and economic recession. But the number of nonpublic bankruptcies has barely risen. Regulators and plaintiffs lawyers say both restatements and sudden public bankruptcies often signal the presence of fraud.

The ultimate cost could be monumental. "Integrity of the markets, and the willingness of people to invest, are critical to us," says Harvey J. Goldschmid, a professor of law at Columbia since 1970 and soon to be an SEC commissioner. "Widespread false disclosure would be incredibly dangerous. People could lose trust in corporate filings altogether."

So will all this be enough to spark meaningful changes in the system? Professor Coffee thinks the Enron matter might move Congress to take action. "I call it the phenomenon of crash-then-law," he says. "You need three things to get a wave of legislation and litigation: a recession, a stock market crash, and a true villain." For instance, Albert Wiggin, head of Chase National Bank, cleaned up during the crash of 1929 by short-selling his own company stock. "From that came a new securities law, Section 16(b), that prohibits short sales by executives," Coffee says.

But the real issue isn't more laws on the books--it's enforcing the ones that are already there. And that, says criminologist Kip Schlegel, is where the government's action falls far short of the rhetoric. In his 1994 study on securities lawbreaking for the Justice Department, Schlegel found that while officials were talking tough about locking up insider traders, there was little evidence to suggest that the punishments imposed--either the incarceration rates or the sentences themselves--were more severe. "In fact," he says, "the data suggest the opposite trend. The government lacks the will to bring these people to justice."

Denny Crawford says there's an all-too-simple reason for this. The longtime commissioner of the Texas Securities Board, who has probably put away more bad guys than any other state commissioner, says most prosecutors make the crimes too complicated. "You've got to boil it down to lying, cheating, and stealing," she says, in a warbly voice that sounds like pink lemonade. "That's all it is--the best way to end securities fraud is to put every one of these crooks in jail."

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