Off to jail

Corporate crime in America

Jun 23rd 2005 NEW YORK
From The Economist print edition

A bad week to be bad

TIME was when prosecutions of corporate executives ended with a whimper not a bang. Starting against a backdrop of outrage, they droned on endlessly amid a mass of convoluted detail, before ending with the perpetrators sent to fairly nice jails for shortish periods.

How different things have become was evident in the past week. On June 17th, Manhattan's district attorney, Robert Morgenthau, prevailed in a long retrial over Tyco's former chief executive, Dennis Kozlowski, and its former chief financial officer, Mark Swartz, who were convicted of grand larceny, conspiracy and fraud. They face a sentencing hearing on August 2nd and a maximum penalty of 30 years behind bars. The full term is unlikely, but a decade or so seems probable. On June 20th, in a courtroom a few hundred feet away, John Rigas, former chief executive of Adelphia Communications, was sentenced to 15 years in jail. His son Timothy, formerly the cable company's chief financial officer, got 20 years. They stole $100m and hid $2 billion in corporate debt, thus looting and defrauding shareholders.

As tough as Mr Rigas senior's sentence was, the district judge, Leonard Sand, said that it would have been longer but for his age (80) and health (not good). In receiving these long terms, they join several other formerly prominent executives who had the misfortune to face sentencing within the past two years, including Andrew Fastow of Enron (ten years), Martin Glass of Rite Aid (eight years), Jamie Olis of Dynegy (24 years) and Sam Waksal of ImClone Systems (seven years). Next up: Bernie Ebbers, the former chief executive of WorldCom, who will be sentenced on July 13th for his part in a massive accounting fraud. Mr Ebbers, aged 63, fears that he will get, in effect, a “draconian life sentence”. In the 1980s, during the last major outbreak of corporate malfeasance, most sentences could be measured in months, not years.

A common element in both the Tyco and Adelphia cases was the decision by local and federal prosecutors to go after individuals rather than the companies that employed them, a strategy that sharply diverged from the approach taken by New York state's attorney general, Eliot Spitzer, in his pursuit of errant big financial firms. Mr Spitzer preferred to extract large financial settlements from the firms, leave most executives in place, and prosecute almost none. With the key executives, alone, facing the music, shareholders and employees of Adelphia and Tyco were not only spared from having to suffer the continued management of crooks, but also from paying for the privilege. Tyco, post-Kozlowski, has made a brilliant recovery, saving thousands of jobs and providing a huge financial bounce for investors. Adelphia's assets were auctioned off: bids have exceeded expectations and investors have enjoyed at least some bounce.

These contrasting prosecutorial strategies raise difficult questions about the correct way to address corporate malfeasance. Even in the Tyco and Adelphia cases, where the targeting only of individuals did much to spare the firms, there is controversy about whether investors would have been even better off had the culprits been pursued with civil rather than criminal charges. Then, the emphasis would have been on recovering still more money for the firm, rather than on punishment. But what about retribution? And what about deterring future crimes?

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