Everyone's talking about the video prosecutors showed Tuesday of a $2 million birthday party in Italy that former Tyco CEO Dennis Kozlowski threw for his wife, partly paid for with company funds. But that's not the biggest outrage in recent days. Last Friday, a hung jury failed to convict investment banker Frank Quattrone on federal charges that he obstructed justice. That mistrial drove home a sad truth: Two years after Enron's collapse began a wave of corporate scandals, many — if not most — of the recent corporate wrongdoers are likely to walk free because they did not clearly violate laws in place in the 1990s.
The failure of our legal system to ensure accountability for corporate abuses that cost investors so dearly sends a terrible message: Ordinary Americans are being reminded once again that the rich live by a different set of rules, while would-be corporate criminals are seeing that crime pays.
Quattrone may yet face another jury. For now, though, the former tech-stocks guru joins the ranks of corporate insiders who have escaped serious punishment for their roles in business scandals.
• Enron leaders Kenneth Lay and Jeffrey Skilling have not been charged with any crime.
• Federal prosecutors have said they will not pursue criminal action against Gary Winnick, who presided over the corrupt telecom firm Global Crossing.
• Star Internet stock analysts Henry Blodget and Jack Grubman — who deliberately misled investors for personal gain — dodged jail time earlier this year when they reached a settlement with New York State Attorney General Eliot Spitzer. It entailed cash payments but no admission of wrongdoing.
No true sense of justice
Prosecutors have a good shot at guilty verdicts in criminal cases involving Tyco, WorldCom and Adelphia executives. But here, as well, a satisfying sense of justice is no sure thing. In the Tyco trial, for example, lawyers for Kozlowski and former CFO Mark Swartz are arguing that the two did not loot $600 million from the company, as prosecutors allege, but rather received these funds in perfectly legal transactions.
If the government hopes to send Americans a message other than "corporate crime pays," it needs tougher laws to deter such acts and more muscle to enforce those laws. Last year's Sarbanes-Oxley Act was only a start. It doesn't adequately ensure that corporate boards aren't filled with cronies and does little to help employees blow the whistle. Even worse, the law doesn't require corporations to be completely open about their offshore assets and liabilities, so investors and regulators really can't tell when a company is playing games with its books. Congress must get working on a follow-up set of reforms that finish the job it began with Sarbanes-Oxley.
Up against the big boys
But even the best laws won't be effective if the government can't expose corporate wrongdoing and win convictions in complex cases. Throughout the 1990s, federal investigators working on white-collar crime were woefully underfunded and understaffed. Little has changed. Despite budget increases, the Securities and Exchange Commission doesn't have enough lawyers to examine even a third of public firms' filings or to dig into much suspicious activity. Nor can federal prosecutors handle all of the securities-fraud cases that come their way. They often won't pursue difficult cases — and go up against lavishly funded corporate legal teams — because they don't have the resources.
It's a travesty that justice won't be done in many recent corporate scandals. But we can deter new executive crimes and ensure that future wrongdoers don't slip through prosecutors' fingers. Such efforts will cost taxpayers, but they should be popular with an investing public that is still footing the bill for one of the greatest orgies of corporate greed in U.S. history.
David Callahan is the research director at Demos, a public policy group. His forthcoming book is 'The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead'.
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