Fraud Squad

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

Only time will tell if the DoJ’s new aggressiveness will root out any real rot in Corporate America or if it is simply a legal witch-hunt. In the meantime, however, most attorneys expect more CFOs to go to jail. “In a case involving falsified financial statements of a public company, executives are very much at risk for jail time, and that’s only going to get worse,” says Falvey. Already, 200 individuals have been charged in such cases, and guilty pleas or verdicts have been secured against 60. “In the white-collar defense world, you win the case preindictment,” says Markey. “Once they [the DoJ] indict, they are emotionally and institutionally committed to the conviction of the individual.”

Alix Nyberg is a staff writer at CFO.

Attention Grabbers

What’s sure to grab the Department of Justice’s interest these days? Good clues can be found in the March 2002 issue of the United States Attorneys’ Bulletin, which outlined four “brazen accounting frauds” — side agreements, swap transactions, backdating, and concealing debt or expenses through special-purpose entities, deferred expenses, or accelerated recognition of losses — that make for good criminal cases.

By all accounts, prosecutors are taking the advice to heart. A side agreement with American Greetings Corp. was the basis of indictments against former Kmart Corp. executives. Alleged manipulations that boosted revenue without actual sales are at the heart of the Inc. case, as well as investigations of many telecom companies. And investigations at WorldCom, among others, hinged on concealing operating expenses as capital expenses.

How long ago the fraudulent activity occurred, how many people were involved, and how much money was lost are also key factors in deciding whether to take a case, say DoJ officials. Still, any willful violation of an accounting law can be construed as a criminal case — a long-standing policy under U.S. law that the Sarbanes-Oxley Act only clarified. The government, however, can charge only on what it can prove was willful, which can be a tall order. That, in part, explains why the DoJ charged just four former Qwest Communications Inc. executives for a single revenue-boosting scheme in late February, while the SEC brought concurrent civil charges against eight for two separate schemes. It wasn’t that the second case — a deal in which Qwest executives (including former Global Business unit CFO Grant Graham) “bought” revenues from Genuity — couldn’t lead to criminal charges later. It’s just that the evidence needed to prove criminal intent takes longer to develop, say experts, because the standard of proof is higher.

Securing that evidence has led to a renewed emphasis on whistle-blowers and employee testimonies. “One common mistake in the prosecution of accounting-fraud cases is to focus on the paper to the exclusion of key witnesses,” the Bulletin article reads. It goes on to advise prosecutors to “ ’flip’ lower-level participants like narcotics prosecutors would,” noting that cooperation can usually be induced by making noncooperators targets of the investigation.

To further that approach, the FBI has set up an agency-staffed hotline to “provide the general public with the opportunity to furnish information concerning suspected corporate- fraud matters directly to the FBI,” according to a press release. The FBI expects the hotline to generate four or five new corporate-fraud cases each month. —A.N.


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