The Enron Era Scandals—What Happened to the Good Guys?

The accounting scandal at the Enron Corp. touched off a media storm that President George W. Bush responded to with the creation of an Enron Task Force at the Justice Department. Its assignment was to track down executives at companies experiencing accounting scandals. One of its first targets was Enron’s accounting firm, Arthur Andersen & Co., which was indicted for obstruction of justice for shredding tons of Enron documents. Arthur Andersen nearly won its case at trial after the audit partner, who had pleaded guilty to ordering the shredding, admitted on cross examination that he did not think that what he was doing was wrong. The government then claimed that Nancy Temple, a mild mannered Arthur Andersen lawyer, obstructed justice by advice she gave on retaining documents and for asking that some wording be changed in a memorandum discussing Enron’s problems. Temple had testified at length and believably before Congress as to why she believed her actions were appropriate, but she was kept off the stand in the Arthur Andersen trial after government prosecutors threatened her with prosecution. That gamesmanship led to the conviction of Arthur Andersen.

The Supreme Court later reversed Arthur Andersen’s conviction, but not in time to save it from destruction. Much outrage was expressed in the press over the 5,000 jobs lost at Enron, but little was said about the 28,000 jobs lost at Arthur Andersen as a result of the government’s misguided prosecution. That was not the only damage. A $750 million settlement offer to Enron investors was pulled off the table by Arthur Andersen after its indictment, and several thousand elderly retirees benefiting from another Arthur Andersen settlement lost their funds as well. Michael Chertoff, Deputy Attorney General at the Justice Department, ordered Arthur Andersen’s prosecution even though he knew that no financial services firm had ever survived an indictment. That decision did not hurt Chertoff’s career. He moved on to head Homeland Security where he displayed no better judgment in handling the crisis over Hurricane Katrina

After slaughtering Arthur Andersen, the government turned to the Enron executives. Many were arrested and subjected to what became a ritual in the Enron era scandals—the “perp walk”— in which executives were paraded in handcuffs in front of the waiting press. There was no purpose for such treatment other than to degrade and humiliate those executives and to prejudice the jury pool. This practice reached its nadir with the dawn raid and perp walk given to John Rigas, the 80 year old head of Adelphia Communications Corp., who was suffering from cancer. That cold blooded assault was intended to strike fear in executives everywhere. The cynicism in these little dramas was made clear when the domestic diva Martha Stewart was allowed to surrender at her leisure without handcuffs in order to avoid sympathy for her plight. Ironically, Stewart was the only executive with any violent tendencies. She reportedly tried to run over a gardener with her car.

Once arrested, the fun really began. The government immediately started coercing lower level employees to “flip” by offering lenient sentences if they would testify against more senior executives. If that did not work, more charges were added so that the employee faced centuries of imprisonment. If that failed, the government started in on relatives. That worked well in the 1980s when Michael Milken, the “junk bond king” pleaded guilty after the government indicted his brother and sent FBI agents to question his 92 year old grandfather. Sam Waksal, the founder of ImClone Systems Inc. who touched off the Martha Stewart scandal, pleaded guilty to criminal charges after the government threatened to prosecute his daughter and his 80 year old father.

The Enron case was broken by extorting a guilty plea from Andrew Fastow, Enron’s chief financial officer. Fastow had initially refused to plead guilty even after the government doubled up on the charges against him. The prosecutors then indicted his wife, Lea, and demanded that the Fastows be tried together so that their two children would be orphaned if they were convicted. That worked and both pleaded guilty even though the income tax charges brought against Lea were a bit phony. The joint tax return she filed with her husband did not report some $67,000 that Andrew treated as a gift rather than income. Normally payment of the taxes and a small penalty would solve such problems, especially since the Fastow’s paid taxes on over $60 million in income that year, which suggests they were not tax cheats. Andrew also tearfully testified at the Skilling and Lay trial that Lea did not know anything about the transaction, but that had no effect on prosecutors. Lea was sent to a maximum security prison, placed in an over-crowded cell and kept under harsh lights for a year so that Andrew would know what was in store for him if he did not bring down Skilling and Lay.

Stacking the deck against any executive demanding a trial was the next phase for the government. This included issuing target letters such as was done with Nancy Temple in order to keep anyone from testifying in favor of the defendants. That tactic was employed against Skilling and Lay and is the subject of an appeal by Bernie Ebbers, the convicted former head of WorldCom Inc. Then came the now infamous “Thompson memorandum” named after its author, Deputy Attorney General Larry D. Thompson. It advised public companies that, in order to avoid indictment for the accounting misdeeds of their executives, they would have to “cooperate.” Since an indictment would destroy a public company, cooperation was mandatory.

According to the Justice Department, cooperation means waiving the attorney client privilege, firing any executive targeted by prosecutors before trial or even indictment and cutting off their attorney fees even if those fees are required to be paid by contract or state law. Federal Judge Lewis A. Kaplan has criticized and is holding hearings on the legality of this last tactic, but other judges joined in with aid and comfort to any and all abuses by prosecutors. Federal Judge Richard Owen assured the conviction of investment banker Frank Quattrone through constant one-sided rulings and biased instructions. Before its reversal on appeal, Quattrone’s conviction was aptly characterized as a “judicial mugging” by a group of public defenders. They were unlikely supporters given Quattrone’s compensation of $120 million a year as an investment banker.

Sentencing abuses were next on the agenda. Prosecutors wanted a 215 year sentence for 80 year old John Rigas at Adelphia, but the judge only gave him a shorter death sentence of 15 years. Bernie Ebbers, who was 63 and suffering from heart problems, was given a death sentence of 25 years by Judge Barbara Jones. Terrorists fared better. Take the case of Ahmed Ressam who was sentenced at about the same time to only 22 years. Ressam was the “Millennium Bomber” who was arrested at the Canadian border with 100 pounds of high explosives that he planned to use to blow up the Los Angeles airport. Then there is John Walker Lindh, the American Taliban, who was captured on the battlefields of Afghanistan trying to kill American soldiers. He was given only 20 years. Ressam’s and Lind’s younger ages and eligibility for early release further reduced the severity of their sentences.

Prosecutors and judges were supposed to be the good guys protecting our rights, not abusing them. The “financial moral panic” that followed the Enron era scandals and turned corporate executives into “Folk Devils”1 might explain this misconduct, but it does not justify it.

1 Jose Gabilondo, Financial Moral Panic! Sarbanes-Oxley, Financer Folk Devils, and Off-Balance-Sheet Arrangements (36 Seton Hall Law Review 781, 2006).