Published January 13, 2015
In the summer of 2003, when a grand jury indicted Martha Stewart (search), pundits asked why the government was going after her for a relatively small personal stock sale when fat cats like WorldCom's Bernard Ebbers (search) walked free.
Fast forward two years to a courtroom two floors above Martha Stewart's, where Ebbers was reduced to tears this week as a federal judge handed down a 25-year prison term for overseeing the $11 billion fraud at the long-distance telephone company he founded.
In the latest wave of U.S. corporate scandals, the days of reckoning are finally here. Legal observers say years of hard, and often delicate, work by prosecutors — initially accused by some of dragging their feet — are now beginning to pay off in high-profile sentencings.
"These were a series of unprecedented cases which were going to take unprecedented resources to prosecute," said Robert Mintz, a former federal prosecutor in New Jersey. "The numbers in these cases were going off the charts."
Besides Ebbers, five other WorldCom executives face sentencing over the next three weeks. The stiffest term is likely to go to Scott Sullivan (search), the finance whiz who admitted carrying out the fraud on Ebbers' orders.
In August, the two Tyco International Ltd. (TYC) executives who were convicted of looting the company of $600 million — including ex-CEO L. Dennis Kozlowski (search), whose spending excesses made him a virtual icon of corporate fraud — will learn their fates as well.
And in January, a trial will start for three top executives of Enron Corp., the energy giant whose collapse in 2001 touched off a wave of corporate scandals.
The Ebbers sentence, handed down Wednesday by Judge Barbara Jones of Manhattan federal court, was the stiffest penalty yet in the Enron-era fraud prosecutions.
Even if Ebbers, 63, reports to prison in October — he may be allowed to stay out on appeal — and gets time off for good behavior, the earliest he could leave is 2027, at age 85.
Legal observers point out that Ebbers' sentence was strict despite a Supreme Court ruling in January that freed federal judges from mandatorily following federal sentencing guidelines.
Jones determined that Ebbers' crimes added up to a sentence of 30 years to life in prison under those guidelines. She gave him a slight break, saying she was impressed by his good works, but still gave him what even the judge admitted was likely a life sentence, given Ebber's heart condition.
"This gets the attention of every executive in the nation," said Michael Proctor, a Los Angeles securities lawyer. "It is harsh. It will have executives thinking."
Ebbers' punishment follows another sentence that amounted to life behind bars: In June, Adelphia Communications Corp. founder John Rigas (search), 80 and in poor health, got 10 years for leading the fraud and looting that bankrupted that company. His son, former Adelphia chief financial officer Timothy Rigas, got 20 years.
The harsh sentences — and few expect a sentence anything but harsh if Ken Lay (search), Jeffrey Skilling (search) and other Enron defendants are convicted — may have something to do with the intense scrutiny lawmakers are placing these days on the judiciary.
"With all of the political pressures, I think that judges are being very cautious about the cases in which they choose to significantly vary their sentences from the guidelines," said Barry Boss, a Washington, D.C., defense lawyer and expert on the guidelines.
And it's not just criminal sentences where the major corporate fraud cases are finally coming to a head. Adelphia's Rigas family agreed this spring to forfeit more than 95 percent of their assets in a civil settlement, a total the Securities and Exchange Commission (search) said would top $1.5 billion.
Ebbers, WorldCom's former board members, underwriters and auditing firm have agreed to civil settlements totaling a staggering $6 billion. Ebbers' share includes forfeiting nearly all his personal assets.
Legal observers say the strict sentences and penalties signal a new era in corporate-fraud prosecutions.
"Compare the sentence Ebbers got with that of Andy Fastow," the former Enron finance chief who got 10 years after pleading guilty, Proctor said. "At the time, some felt that was a long sentence. Now, in hindsight, it looks like a favorable outcome for him."
It was Fastow's guilty plea, struck in January 2004, that spurred Sullivan, at the time the highest figure charged in the Worldcom fraud, to plead guilty and turn on his former boss, Ebbers.
Only then did prosecutors have what they needed to indict the former CEO — and, ultimately, to put him away for a quarter-century.
"The public's impatience with the pace of these cases was really a function of more frustration than any conscious effort of the part of the government to drag its feet," Mintz said.
"It simply took prosecutors time to build these cases and to sort out the frauds," he said. "They were far more complex than anybody could have imagined 10 years ago."