Copyright (c) 2004, 
Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.CALL IT the reverse Nuremberg strategy.
Chief executives of scandal-ridden companies such as WorldCom, Sotheby's Holdings Inc., Cendant Corp. and now Enron Corp. all have claimed that they didn't know about the alleged fraud at their businesses and blamed it largely on underlings.
It is the opposite of the defense used at the Nuremberg trials, when Hitler's minions claimed they were only carrying out orders from above. In the corporate-fraud cases, the argument is that the top dog was so above the fray that he didn't know what directives were being issued or carried out by those below him. Enron's Kenneth Lay yesterday specifically cited his former chief financial officer, Andrew Fastow, saying that Mr. Fastow had "betrayed" his trust. Mr. Fastow has pleaded guilty in the case.
White-collar criminal lawyers also call this legal tactic the "30,000 foot" defense -- from the notion that a chief executive can't possibly be held responsible for all the goings on so far below him. Never mind that the same CEO might have once billed himself as a hands-on manager, taking credit for the details behind all the good news that came before the fraud.
The Sarbanes-Oxley Act, which requires CEOs and their chief financial officers to sign all financial statements attesting to their veracity, was designed in part to short-circuit such defenses, and will make them more difficult from the future. But that law was passed after most of the current crop of corporate-fraud cases arose. And lawyers in these cases are falling back on the "wasn't-me" defense because it's often the only strategy left in a fraud case -- even though it doesn't always work, as yesterday's verdict in the Adelphia Communications Corp. case showed.
A federal jury convicted Adelphia founder John Rigas and his son Timothy, who had been the cable-TV company's chief financial officer, of fraud. The elder Mr. Rigas said he had relied on Adelphia's board and its outside accountants and lawyers to warn him of any potential abuses.
"Does [John Rigas] have a right to believe that things would be done properly, that adequate and appropriate disclosures were made, that the lawyers and the accountants and the personal accountants would make sure of that?" Mr. Rigas's lawyer, Peter Fleming, asked in his summation.
Another high-profile case in which the defense didn't work was the 2001 price-fixing trial of the former chairman of Sotheby's, A. Alfred Taubman.
Mr. Taubman's former No. 2, CEO Diana D. Brooks, pleaded guilty and became the star witness against her boss. Despite tough questioning from defense lawyers, Ms. Brooks's testimony helped persuade jurors that Mr. Taubman knew that Sotheby's had conspired with rival auction house Christie's International PLC to fix fees charged to auction clients.
Indeed, the judge in the case came down hard on Mr. Taubman, then 78 years old, ignoring a government recommendation for no jail time and instead sentencing him to a year in prison, while Ms. Brooks avoided serving time.
Yet the defense tactic is being employed in other high-profile corporate-fraud cases, including those of Richard M. Scrushy, the former HealthSouth Corp. chairman and CEO, who is facing trial; and of Walter Forbes, the former chairman of Cendant Corp. who is currently on trial.
In the Cendant case, Mr. Forbes and his former vice chairman, E. Kirk Shelton, are blaming underlings, including former chief financial officer Cosmo Corigliano, who pleaded guilty to fraud charges and is testifying in the case.
Lawyers for Mr. Scrushy, who was indicted last fall, are blaming not one but several of the company's former finance executives, all of whom have pleaded guilty in the case. Mr. Scrushy faces several counts of violating Sarbanes-Oxley. He has challenged the constitutionality of the law in a pending case.
That defense first surfaced during a court hearing in the spring of 2003 as Mr. Scrushy successfully fought off an attempt by the Securities and Exchange Commission to freeze his assets. During the hearing, Mr. Scrushy's attorney, Thomas Sjoblom, repeatedly painted Mr. Scrushy's underlings, including former chief financial officers William Owens and Weston Smith, as the real perpetrators of the fraud. The two were the first former executives to agree to plead guilty at the outset of the Justice Department's investigation.
When Mr. Smith took the stand, Mr. Sjoblom asked, "Owens is the mastermind behind the whole operation, isn't he?" Later, the attorney described Mr. Owens in mafia terms, asking Mr. Smith if Mr. Owens wasn't the "don" of the conspiracy. Mr. Smith invoked his Fifth Amendment right to silence in response to both questions.
In the case of WorldCom (now known as MCI), the defense plans aren't yet clear, but it appears the strategy of blaming the chief financial officer is likely. A lawyer for former WorldCom CEO Bernard J. Ebbers, who was indicted on fraud charges in March, has signaled he will try to undermine the credibility of former chief financial officer Scott Sullivan. As in the Enron case, a guilty plea by the financial chief led quickly to the indictment of the company's former top executive.
Initially, defense lawyers in such cases often claim that the activity under scrutiny wasn't illegal. But "in a situation where the government alleges a fraud was pervasive throughout a company, it's difficult for a chief executive to claim each transaction was lawful. That's too many fires to put out" during a trial, says Barry Berke, a white-collar defense lawyer with Kramer Levin Naftalis & Frankel LLP in New York.
It becomes even more difficult for the top exec to argue that there was no crime when the government has garnered guilty pleas from several of his top underlings. The CEO's legal team is left in the position of having to argue that the lot of them are lying when they testify against their boss -- often a tough argument for juries to believe.
The other key reason defense lawyers use the wasn't-me defense is that it can be tough for prosecutors to prove that the CEO not only knew about the crime but also intended to break the law. After all, a defendant can't have intended to commit a crime if he didn't have any knowledge of the activity, lawyers say.
Whether the argument works, however, depends a lot on the quality of the evidence gathered by the government showing the defendant knew about the activities behind the fraud. It hasn't helped the government in building cases against Mr. Ebbers, late of WorldCom, or against Mr. Lay that neither favored e-mail as a means of communicating with their staff. E-mail has become one of the government's favorite tools for showing an executive's state of mind and his intention, or knowledge, of wrongdoing.
In the end, however, juries are sometimes swayed in favor of the prosecution by the idea that a fraud that is as pervasive as that at Enron or WorldCom can't have been unknown to the chief, defense lawyers say. After all, juries sometimes reason, that's why he is paid the big bucks.
It also doesn't escape the attention of juries when the fraud ends up boosting the company's financial results, and by extension the CEO's compensation.
"The classic reaction among juries is that the company went down and the captain should be held responsible," says Ralph Ferrara, a defense lawyer with Debevoise & Plimpton LLP in New York. "Unfortunately, its conviction by association."
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Carrick Mollenkamp, Shawn Young and Peter Grant contributed to this article.
(See related articles: "Dunning the Deposed Boss" and "Former Enron CEO Makes His Case on Television" -- WSJ July 9, 2004)
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