Corporate Deviance

CEOs on Trial

From Martha Stewart to Enron

On March 4, 2005 Martha Stewart was released from federal prision after serving a five-month sentence for conspiracy, obstruction, and lying to federal investigators about her allegedly illegal sale of stock in the biotechnology firm, ImClone Systems Inc.. Her indictment, trial, and conviction a year earlier received a tremendous amount of publicity. She was not only the CEO of Martha Stewart Living Omnimedia, Inc.--a large and profitable corporation--but also a highly visible celebrity who symbolized the growing influence of women in corporate America. Her "guilty" verdict and prison sentence served as a dramatic morality tale for the public and corporate leaders by demonstrating that fame, wealth, and power could not provide immunity from the prosecution and punishment of corporate deviance.

This same message was repeated less than two weeks after Stewart's release from prison when Bernard Ebbers, former CEO of WorldCom, was found guilty in federal court of securities fraud, conspiracy, and filing false reports. However, the extent of his alleged crimes far exceed those of Stewart, whose ImClone stock sale avoided a loss of less than $50,000. Ebbers' fraudulent activities during the 1990s in building and then bankrupting his gigantic telecommunications firm cost investors an estimated total of $11 billion dollars. According to the FBI's estimate of the costs of conventional crimes for 1999, this is more than the total cost to U.S. citizens of robbery, burglary, and larceny-theft combined! Ebbers was sentenced to 25 years in prison on July 13, 2005.

CEOs on Trial: Martha Stewart, Bernard Ebbers, Dennis Kozlowski, Richard Scrushy, and Kenneth Lay.

After a mistrial in 2004, Dennis Kozlowski was recently retried for grand larceny, security fraud, conspiracy, and other illegal activities in which he allegedly engaged while he was CEO of Tyco International. He was found guilty on 22 counts and received a sentence of up to 25 years in a New York State prison on September 19. Kozlowski has become something of a "poster boy" for corporate deviance as a result of his extravagant spending and looting of corporate funds to the tune of $600 million dollars. For example, his purchases at Tyco's expense included a poodle-shaped umbrella stand for $15,000 and an extensive collection of fine art that decorated his apartments and vacation homes. He allegedly spent a million dollars of Tyco funds on a lavish birthday party for his second wife, which featured a fountain modeled after Michelangelo's David spouting champagne from its private parts. As one investigator observed, Ebbers and some of his fellow executives treated "Tyco as their private bank, taking out hundreds of millions of dollars of loans and compensation without ever telling investors" (http://www.nydailynews.com/news/story/18669p-17595c.html).

Meanwhile, down in Birmingham, Alabama, Richard Scrushy was tried for a number of charges stemming from his activities as CEO of HealthSouth, which grew since he founded it to become largest provider of outpatient surgery, diagnostic imaging and rehabilitation services in the U.S. Charges in the federal indictment of Scrushy include conspiracy, mail, wire and securities fraud, false statements, false certifications and money laundering. Although all five of Scrushy's former Chief Financial Officers testified against him, a jury acquitted him of all criminal charges on June 28, 2005. The Securities and Exchange Commission is currently pursuing civil charges of fraud against Scrushy which potentially carry a penalty of three-quarter of a billion dollars. Scrushy has denied any wrong-doing and, interestingly, sponsors a public website that offers an alternative view of his leadership of HealthSouth and defends against the changes brought against him: http://www.richardmscrushy.com/

Finally, the late Kenneth Lay was tried and found guilty earlier this year in Houston for conspiring to manipulate financial reports and misrepresent the financial health of Enron, an energy trading company that became one of the largest corporations in the U.S. prior to its bankruptcy at the end of 2001. Lay suffered a fatal heart attack on July 5 while awaiting sentencing. It is difficult to determine the dollar cost to energy consumers, investors, Enron employees, state and local governments, and businesses that resulted from fraud, price and stock manipulation, misuse of funds, and other illegal activities that Lay and other executives allegedly practiced at Enron. The investigation and prosecution of corporate deviance at Enron took on special political importance because of close ties in the past between members of the Bush administration and Enron executives, including Lay. Perhaps the most revealing documents about the corporate culture at Enron are a series of audio tapes of Enron energy traders joking about their illegal efforts to maintain critical shortages of electric power and drive up energy prices in Western states. Listen to the following sample at cbsnews.com (click here). A useful archive of news stories and other material on Kenneth Lay and corporate deviance at Enron is available from the Houston Chronicle (click here).

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