|What Does 25 Years Do?|
Stiff Sentences' Effect as Corporate Fraud Deterrents Debated
By Brooke A. Masters
Washington Post Staff Writer
Thursday, July 14, 2005; Page D01
NEW YORK, July 13 -- In the early 1990s, Wall Street titan Michael Milken was sentenced to 10 years in prison for his role in the financial scandal of the day, served less than two years and emerged with most of his fortune. On Wednesday, former WorldCom Inc. chief executive Bernard J. Ebbers was sentenced to 25 years after already surrendering most of his millions.
At least two things worked against the former telecommunications chief, legal analysts said. Judges and prosecutors these days think huge sentences are necessary to deter corporate crime, and society's thirst for vengeance has increased as well.
Stiff sentences like Ebbers's and the 15-year term handed down recently to Adelphia Communications Corp. founder John J. Rigas, 80, are having a positive effect on corporate behavior, said former prosecutor Seth C. Farber. "I think corporate executives are very aware of the recent spate of prosecutions and enforcement actions. People do feel the risk of personal exposure. It's causing people to be more cautious in how they act," he said.
But some lawyers were asking whether the pendulum has swung too far. "This sentence is too harsh. I don't get the societal purpose that is served by the notion that he's going to die in prison," said defense attorney Charles A. Stillman, who represented another corporate executive recently brought low, former Tyco International Ltd. finance chief Mark H. Swartz. "In Europe they don't have sentences like this. Is everybody stealing over there?"
Ebbers came up for sentencing at an especially unfavorable time for his central role in a scheme to hide WorldCom's expenses and inflate revenue. In the early 1990s, the financial world was shocked that powerful people such as Milken and inside-trader Ivan F. Boesky were going to jail at all. Milken's 10-year sentence was considered harsh at the time, but he was eligible for parole after three years and a judge reduced his sentence to 22 months because he cooperated with the government.
After a new wave of corporate scandals broke in 2002, small investors revolted and many argued that more had to be done to stop financial crime. The federal guidelines for white-collar crime have grown steadily stiffer, with more emphasis placed on the losses investors incurred. And parole has been abolished in the federal system, so Ebbers has little hope of cutting down his sentence on the back end. (Federal prisoners generally serve at least 85 percent of their terms.)
U.S. District Judge Barbara S. Jones actually cut Ebbers, a Canada-born former milkman, a slight break when she handed down a 25-year sentence -- the guidelines recommended 30 years to life for a financial crime of this magnitude. "Bernie Ebbers was transformed into a symbol, a distorted picture of corporate corruption" that did not reflect his "life of unbelievable kindness," his lawyer Reid H. Weingarten said after the sentencing. He vowed to appeal.
Defense attorney Kirby H. Behre said Ebbers's sentence can be seen as an overcompensation for the earlier era. "Some believed those sentences [in the late 1980s and early 1990s] had very little deterrent effect. Now the pendulum has swung, but it's swung too far the other way," he said. "To blame the entire chain of events" -- including WorldCom's June 2002 decision to seek bankruptcy protection -- "on Ebbers, without taking into account the contribution of others and the impact of an irrational Wall Street, I don't think that's absolutely fair."
Veteran defense attorney Robert G. Morvillo said it is unlikely the Ebbers sentence will deter others. "If the sentence was five years, the deterrent impact would have been precisely the same," he said. "Nobody goes so far down the line that they say, 'Oh, my God, I might get 20 years rather than 15.' "
Far more effective, Morvillo said, are the financial penalties extracted from Ebbers before sentencing. Late last month, Ebbers agreed to give up or sell 95 percent of everything he owned to raise about $45 million to settle the claims of investors who lost money when WorldCom collapsed into bankruptcy protection. "If greed is a motivating factor, taking away the benefits of the commission of the crime and leaving people and their families in a state of economic insecurity . . . has more of a deterrent effect," he said.
But other legal analysts said harsh prison sentences are vital because they not only deter bad behavior, they make it easier to persuade lower-level executives involved in fraud to cooperate with prosecutors. "It's critical for the government that the sentences of those people who do go to trial be made exemplars" with long prison terms, said Fordham University law professor Daniel C. Richman, a former federal prosecutor. That way "defendants who are guilty accept responsibility and plead guilty and potential defendants come forward and give the government information and get a much lighter sentence."
That tough message is particularly necessary right now, some analysts said, because of the acquittal last month of HealthSouth Corp. founder Richard M. Scrushy. At the outset, the government's case against Scrushy appeared much stronger that its evidence against Ebbers -- all five former HealthSouth finance chiefs had implicated Scrushy in the $2.7 billion accounting scam, while the case against Ebbers rested squarely on the shoulders of former finance chief Scott D. Sullivan, the only witness to testify that Ebbers had personally directed him to commit an $11 billion fraud.
"This will help soften the deleterious effect of the Scrushy verdict," said University of Texas law professor Henry T.C. Hu. "You don't want the decision about whether or not to commit fraud to become a cost-benefit calculation." If Ebbers had gotten a short sentence on top of Scrushy's acquittal, Hu said, some corporate officers might think, "Hey -- a lifetime of wealth, it might be worth it."
University of Missouri law professor Frank O. Bowman said the Ebbers case may be an exception to the general criticism that white-collar sentences are getting out of control. "There's a question about whether the guidelines are several orders of magnitude harsher than is necessary," Bowman said. But "when you are talking about frauds and losses in the billions of dollars range and you're not talking about technical wrongdoing but real, classic fraud, does it bother me that we're going to send him away for life? No."