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Bush Administration Taking Tough Line with Corporate Criminals - 2003-10-01

Two criminal trials are underway in New York City relating to alleged fraud at major U.S.-based corporations. Two years after accounting irregularities brought down Enron, a huge Texas-based energy company, there are signs that the Bush administration is going to take a tough line in the prosecution.

Jury selection is underway in the high-profile trial of Dennis Kozlowski, the former head of Tyco, a once high flying conglomerate. Mr. Kozlowski is accused of stealing $600 million from the company. Jay Fahy, a former federal prosecutor, expects the trial to go on for three months. He describes what the prosecution and defense will be looking for in a jury.

"The right jury for the government will be one where you have mid-level management people, people who know something about corporations and may have invested in them," says Mr. Fahy. "The right jury for the defense in the Kozlowski case is going to be people who believe corporate greed is fine, that this is capitalism, that there is nothing wrong with a CEO making all kinds of money."

Corporate America has been stunned by revelations of fraud and greed inside executive suites and board rooms. The scandals gained widespread attention when Enron collapsed in 2001 and again in 2002 when WorldCom, the second largest U.S. telecommunications company, collapsed in a similar accounting scandal.

Bernie Markstein, an economic consultant near Philadelphia, says the scandals show that boards of directors have not been doing their jobs. Most of the part-time board members have other jobs, often as the chief executives of other companies. Mr. Markstein says the board members too often just follow the advice of management.

"Probably these guys are so busy doing something else that they're not fulfilling their function, even though they are being paid fairly nice compensation packages for being on the board," he says. "You'd think they sit down and be looking at this stuff [compensation and business operations]. But I guess they didn't and if they did they glossed over it or accepted whatever the management was telling them."

Many in investing public have been enraged by the plundering of companies like Tyco, Enron and WorldCom. So far, with the exception of Tyco's Mr. Kozlowski, few of the top executives have been put on trial. William Donaldson, the new head of the government regulator the Securities and Exchange Commission, says he is looking closely at Enron. Mr. Markstein believes more prosecutions are coming and he expects the former head of Enron, Kenneth Lay, will be brought to trial.

"Yeah, if they [the federal authorities] can prove what he appears to have done [giving the ok to accounting irregularities] and what he did was illegal, I think there'll be jail time thrown in there," says Mr. Markstein. "People are pretty upset. And politically there will be pressure on the judges to hand down some jail time."

More recently even the venerable New York Stock Exchange has been tainted by scandal. Two weeks ago its chairman, Richard Grasso, was forced to resign after it was revealed that his salary and retirement package totalled nearly $180 million. While Mr. Grasso is not thought to have broken any law, institutional investors were furious that he accepted such generous compensation from a board, many of whose members he appointed and whose companies he was supposedly regulating.

Some 2800 companies with a market capitalization of $15 trillion are listed on the 211-year-old New York Stock Exchange. Its new interim chairman, former banker John Reed, is promising far-reaching reforms.