Global Policy Forum

By Dan Ackman

Whenever a big criminal trial ends, the search for meaning begins, and trends are divined from a sample of one. After the conviction yesterday of former WorldCom Chief Executive Bernard Ebbers on securities fraud and conspiracy charges, the search started anew. It was said that juries will not believe the "CEO doofus" defense and that other CEOs should be worried by Ebbers' fate, which, by the way, could mean 85 years in prison.

The 85 years, however, is just the first fiction. It's the number you get by taking the maximum sentence on each of the nine counts and adding them up. While U.S. federal sentencing rules are in flux due to a recent U.S. Supreme Court ruling, the sentence will certainly be much less. George Newhouse, a criminal defense lawyer with Thelen Reid & Priest in Los Angeles, predicts five to ten years. Douglas Berman, a professor at the Ohio State University law school and an expert on federal sentencing, says so much remains in dispute that the likely sentence is now "unknowable."

In fact, the Ebbers' case is a freak by any measure. Start with the simple fact that he went to trial. Of the 82,910 defendants accused in federal courts in 2004, just 3,393, or 4%, stood trial at all, according to the U.S. Office of Court Administration. Securities fraud cases are also extremely rare: In 2004, there were just 116 defendants whose cases were disposed of in the entire U.S., a remarkably small number considering the number of financial restatements, corporate blowups and dream-state analyst reports in recent years. If you are a CEO among the 116, that's cold comfort, but it's not something you really need to worry about.

Worries should dissipate further if your books are clean or if you are truly remote from the crime. "It's not as if he was convicted of something he had nothing to do with," notes G. Jack Chin, a law professor at the University of Arizona. Ebbers was accused of at least knowing and in some ways directing the fraud masterminded by his chief financial officer, Scott Sullivan. While the evidence against him came almost exclusively from Sullivan, the jury was convinced.

Another key fact in the Ebbers case was that he was no longer CEO. The board fired him in 2002, before the fraud was revealed. By the time the company entered bankruptcy, which occurred soon after, the company's board was eager to distance itself from Ebbers and to shift the blame in his direction (and away from the board). Current CEOs don't have this problem.

Some observers say Ebbers lost it by taking the witness stand. Now that he has been convicted on all counts, it is fair to say that the outcome could not have been worse had he stood silent. But his lawyer Reid Weingarten yesterday defended the decision to have the defendant testify, and he is probably right. The "doofus" defense, by the way, was not offered. Ebbers did not claim he knew nothing. He did say he did not know that the WorldCom accounting was fraudulent, and, he noted, many of the company's accountants didn't know that either. As it was, the case came down to Sullivan's word against that of Ebbers. Without Ebbers testifying, it would have been Sullivan's word against nothing. As it stood, the case was close enough that the jury was out for eight days.

While the jury did not believe him, it's quite possible Ebbers believed himself. Yesterday in an interview, Michael Missal, chief counsel to the examiner in WorldCom's bankruptcy case, said the questionable accounting at WorldCom started well before 2000, when Ebbers' crimes began. The company, which has since emerged from bankruptcy as MCI, had a practice of overstating reserves set aside after its many mergers. When it needed to show extra income, it would "bleed reserves into income," Missal says. Other companies do this too, along with other forms of "earnings management." As accepted practices bleed into fraud, it's possible that Ebbers--even if he knew what was happening--thought he was doing nothing illegal.

The Ebbers case does indicate, though, that the Justice Department can win a jury trial on accounting arcana, even against a defendant with all but unlimited resources. This result is not too surprising. Of the eight securities fraud trials nationwide in 2004, the government won six. That's not quite as good a winning percentage as the Justice Department has in other cases, but it's still pretty high. And prosecutors in the Southern District of New York, where Ebbers was tried, have a better record still.

The case also may show that juries are willing to hold CEOs responsible for fraud on their watch--and in the case of WorldCom, the fraud itself was conceded. They proved willing to do this even when the one witness implicating the boss was an admitted criminal. Based on this verdict, Kenneth Lay and Jeffrey Skilling of Enron, and others like them, may indeed grow worried. But the few CEOs in their shoes should have been worried already.

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