July Sentencing Results Vary Widely In Federal Securities Fraud Cases
On July 28, the U.S. Court of Appeals for the Second Circuit affirmed a twenty-five year sentence for former WorldCom CEO Bernard Ebbers. To no avail, Ebbers complained that his sentence, which most foresee as a life sentence for Ebbers, age 65, was too severe when compared to sentences meted out to other WorldCom officials who cooperated with the government's prosecution. The outcome came as another significant sentencing victory for the Justice Department in securities fraud cases, as earlier during July the U.S. Court of Appeals for the Eleventh Circuit reversed a seven-day prison sentence for former Health South CFO Hugh Martin, and a sentence to probation for former Southern Pride Contractors Inc. Comptroller Michael Crisp. In both cases, the Court found such light sentences to be unreasonable, citing applicable United States Sentencing Guidelines for securities fraud cases. In the Martin case, the Eleventh Circuit noted that Martin paid a $2.4 million money judgment forfeiture at sentencing. The Court of Appeals reasoned that a probationary sentence under these circumstances would send a message that wealthy corporate executives can buy their way out of prison.
It helps, of course, to have the prosecutor on your side at sentencing. In another July 28 sentencing proceeding, former Qwest Communications International Inc. CFO Robin Szeliga received a probationary sentence for $125,000 in insider trading during 2001. She paid a $250,000 fine. In a parallel SEC action, Szeliga is implicated in much more wide ranging misconduct in connection with Qwest's $2.5 billion revenue accounting restatements for 2001 and 2002. Federal prosecutors in Denver advocated the probationary sentence on the condition that Szeliga complete six months' home detention. The prosecutors advised U.S. District Judge Walker Miller that Szeliga, a witness in the upcoming $100,000,000 insider trading prosecution against former Qwest CEO Joseph P. Nacchio, will testify to "central" conversations involving Nacchio. If convicted, Nacchio faces a sentence not unlike Ebbers. No trial date has been set.
While these prosecutions conclude the accounting and securities fraud cases growing out of the 2001 market downturn, another round of corporate abuse cases has been spawned by the Corporate and Criminal Fraud Accountability Act enacted in 2002 as part of the Sarbanes-Oxley legislation. Although the Justice Department experienced mixed results in its pre-Sarbanes obstruction of justice prosecutions of Frank Quattrone and Arthur Andersen, the Justice Department has nevertheless extracted guilty pleas in several Sarbanes era obstruction prosecutions. Upcoming obstruction of justice cases awaiting sentencing will be especially interesting to follow. For example, former Computer Associates executives Sanjay Kumar and Stephen Richards await sentencing in federal court in Brooklyn - on the novel theory that lies they told to the company's lawyers during an internal investigation would foreseeably obstruct a federal investigation of Computer Associates once the evidence from the investigation was turned over to prosecutors. Sarbanes obstruction cases have more favorable sentencing guideline considerations and factors than traditional securities fraud prosecutions. Thus, despite the difficulty of proving an obstruction case, accepting guilt on a novel prosecution theory is becoming more attractive to the corporate executive facing a Hobson's choice of pleading guilty to obstruction, on the one hand, or defending cases like the ones against Ebbers and Nacchio on the other.
