Fraud Squad

Federal investigators are on a crusade to elevate corporate misdeeds to criminal offenses.

That means that executives — particularly finance executives — have become targets for prosecutors looking for a win with superiors. “Many of the [accounting] cases I’m involved in, and my colleagues say the same thing, would not have been the subject of criminal investigations a few years ago,” says Jan L. Handzlik, a partner at Kirkland & Ellis. Adds Thomas E. Dwyer Jr., a white-collar defense attorney at Dwyer & Collora in Boston, “Every office is looking for its own Enron.”

More Than Tough Talk

Of course, the DoJ has long talked tough about corporate fraud, and has brought action against executives at companies that created massive investor losses, such as Cendant and McKesson. Yet, while prosecutors have had the legal authority to bring criminal fraud charges since the 1930s, the agency has historically stuck to crimes that yield more tangible evidence, such as murder, kidnapping, or illegal arms possession.

“[Accounting] cases are not easy to prosecute, since they have to prove that an executive knew or should have known about the fraud in order to indict,” says John K. Markey, a partner with Mintz Levin Cohn Ferris Glovsky and Popeo PC and a former assistant U.S. Attorney. That’s a higher burden of proof than SEC investigators typically require for civil cases, which are contingent on proving only that a filing contained incorrect information. Given the volume of resources required for the DoJ to build such cases, most prosecutors have found it worthwhile to take on corporations in only the most egregious or clear-cut instances.

Thanks to recent legislative changes, however, lawyers see a future in which many common accounting snafus, including restatements, could put executives at risk for jail time. “With the new Sarbanes-Oxley requirement to have strong internal controls and officer certification of financial statements, the bar has been lowered on the ‘knew or should have known’ standard,” says Markey. “The presumption will be that the CFO must have known if something has gone wrong.”

Just how fierce this chase will be and how long it will last is anyone’s guess. At press time, the DoJ had opened more than 150 investigations into allegations of corporate fraud. The FBI alone claims to have opened more than 50 major corporate-fraud investigations since initiating the Enron investigation in December 2001. And if the geographic scope of the investigations and the speed with which prosecutors are bringing indictments are any indication, there is good reason for many more companies to be concerned.

The U.S. Attorney’s Office in St. Louis, Missouri, for example, best known for prosecuting drug pushers and counterfeiters, is now investigating Charter Communications Inc. for alleged accounting fraud. Kmart Corp.’s management decisions are being probed by the Eastern District of Michigan. And the indictments against four former Qwest executives for allegedly booking revenue that should have been deferred were issued from the Colorado U.S. Attorney’s Office, which credited the Task Force’s oversight with speeding up the investigation.


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