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Friday, January 07, 2005

Chief Executive Was Paid Millions, and He Never Noticed the Fraud?

THE dummy defense worked, and the era of the former chief executive who remembers doing virtually nothing to earn his millions is upon us.

As chief executive of CUC International, Walter A. Forbes presided over a company whose books told lies for more than a decade. When the fraud was uncovered in 1998, after CUC had merged into the Cendant Corporation, it was the largest accounting fraud in American history.
This week, after a trial that lasted seven months and deliberations that lasted another month, a federal court jury convicted CUC's No. 2 executive, E. Kirk Shelton. But it was unable to reach a verdict on Mr. Forbes.

That there was a fraud is not in question. For many years, CUC inflated its revenues and hid expenses. "The defense of Walter Forbes is that he didn't know about it," said Brendan Sullivan, his lawyer, in closing arguments. He blamed it all on Cosmo Corigliano, the former chief financial officer and the prosecution's chief witness. Mr. Corigliano testified that he briefed Mr. Forbes using "cheat sheets" that showed how the revenues and profits were being inflated, but Mr. Forbes denied that. Mr. Sullivan branded Mr. Corigliano a "serial liar" and a "con man."

Mr. Forbes said he saw no need to pay attention to what was happening inside the company. He worked on "the strategy vision part, talking to key clients, being the outside voice of the company," he testified. "I think I was much more valuable to shareholders doing that than being in day-to-day operations."

You do not see many active chief executives who admit to being uninvolved in - and even uninterested in - day-to-day operations, but that appears to be the preferred defense for those whose companies turn out to be huge frauds. This trial shows such a defense can work, at least to persuade some jurors that underlings mount frauds while the bosses ponder the big picture and rely on the accountants.

Such a defense is expected at the trial of Richard M. Scrushy, the former chief executive of HealthSouth, where jury selection is under way. Mr. Scrushy's lawyers face the larger hurdle that a succession of chief financial officers, not just one, is expected to testify against him.

Bernard J. Ebbers, the former chief executive of WorldCom, is expected to mount a similar defense, as will Jeffrey K. Skilling and Kenneth L. Lay, the former chief executives of Enron. When Mr. Skilling testified before Congress after Enron failed, his mantra was "I am not an accountant." That testimony so infuriated Congress that it put into the Sarbanes-Oxley law a provision requiring chief executives to certify their company's financial statements.

Officials of the Securities and Exchange Commission used to complain privately that it was difficult to get the Justice Department to bring criminal charges in accounting fraud cases. Many United States attorney offices lacked expertise in accounting and feared that such a case would mean a lengthy trial that would leave jurors baffled.

Enron changed that, but a string of acquittals or hung juries in the pending chief executive cases could make prosecutors reluctant to pursue new cases.

In Enron, WorldCom and HealthSouth, chief financial officers eventually agreed to plead guilty, usually after insisting they had done nothing wrong. Chief executives tend to not leave paper trails of involvement with fraud, so the financial officers' testimony can be critical. But their previous denials make it easy to brand them as liars.

If bosses walk while their subordinates go to jail, it will confirm the wisdom expressed to Max Bialystock, the not-so-honest boss in the "The Producers," the Tony Award-winning Broadway show: "It's good to be the king."

posted by Brian Moran @ 9:00 AM   0 comments


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