Jail To The Chiefs?

The Bush administration may be unsure about how to get rid of Saddam Hussein, but it has already decided how to go after alleged evildoers in Big Business — with guns blazing. "If you're a CEO and you think you can fudge the books in order to make yourself look better, we're going to find you, we're going to arrest you and we're going to hold you to account," President Bush said last week in a speech in Charleston, S.C.

It didn't take long for the FBI to make good on that promise. A week after hauling in Adelphia Communication's frail, white-haired founder, John Rigas, and two of his sons as if they were armed and dangerous, FBI agents gave former WorldCom executives Scott Sullivan and David Myers the same star treatment, parading the handcuffed quarry in an early-morning perp walk and prompting Sullivan's lawyer to complain about "the unfair taint of the current political climate."

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"We didn't have anything to do with it," a senior Administration official says of the high-profile collars. "But of course they're a big help. It means the system is working, and that helps with [investor] confidence." If so, that wasn't reflected in the stock market, which swooned on Thursday and Friday.

Arrests and indictments don't necessarily result in convictions — think back to the Wall Street scandals of the 1980s. But for now, with midterm congressional elections just a few months away and control of the House and Senate at issue, that's almost beside the point. Nor is the spectacle over. The House Energy and Commerce Committee in particular is contemplating more hearings this fall, with an invitation list that might include everyone from Global Crossing to ImClone, a committee source told Time. And as Democratic opponents seize on the White House's cozy links to corporate America — and especially to Harken Energy and Halliburton — the Bush Administration seems to believe that the best defense is a full-scale offensive.

Though by far the most visible, the WorldCom duo wasn't the only prey: telecom firm Qwest, already under investigation by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ), is close to restating the past three years of earnings by more than $1 billion; apparel maker Warnaco is now in the SEC's cross hairs; and prosecutors were driving a hard bargain in plea negotiations with ImClone's ex-CEO Samuel Waksal, insisting that he accept at least seven years in prison on insider-trading charges and declining to spare his family members from prosecution.

The latest addition to the Justice Department's list is AOL Time Warner, TIME's parent company. Justice confirmed last week that it would follow up on the SEC's investigation into how the company's AOL division accounted for some $270 million in revenue over the past two years. The amount involved is almost trivial in a $38 billion-a-year company, but the implications are not. The agencies are investigating whether AOL executives contrived to misstate advertising revenues to puff up the performance of AOL just as it was closing its merger with Time Warner. AOL Time Warner CEO Richard Parsons has been adamant in declaring the company's innocence and asserting that it followed accounting rules properly, a position backed by its accountant Ernst & Young, which reaffirmed its opinion after the Washington Post brought the transactions to light last month. The investigation is in its earliest stages; in fact, Justice Department lawyers and officials at AOL haven't had a face-to-face meeting yet. But the prospect of the DOJ's worming its way through any company sits uneasily on the minds of investors, who sliced AOL's stock price in response.

The actions last week underlined an unusually high level of cooperation between Justice and the SEC, which has limited subpoena powers and a more complex bureaucracy to navigate. Attorney General John Ashcroft emphatically announced that Justice was raising the stakes, declaring that "corrupt corporate executives are no better than common thieves when they betray their employees and steal from their investors." He noted that the WorldCom executives could face as much as 65 years in prison, which legal experts dismissed as prosecutorial hyperbole. Yet as former federal prosecutor and Los Angeles white-collar defense lawyer Mark Beck notes, "The criminal sanction is so severe that it can motivate someone to play ball and become a government witness in exchange for leniency."

Curiously, the arrests anticipated for so long — at Enron — have yet to materialize. Given the Administration's links to the disgraced energy trader, there is a risk that it will be seen to be foot dragging on the prosecution of longtime Bush buddies (and supporters) such as former CEO Ken Lay. "There hasn't been anyone in handcuffs from Enron, and we don't know why," Senate majority leader Tom Daschle said last week. While declining to comment on the specifics, Deputy Attorney General Larry Thompson, who heads the corporate-fraud strike force, said that "some cases are more complex than others." Even with prosecutors laboring on the Enron Task Force, getting a handle on the company's complicated structure and litany of off-balance-sheet partnerships is no small feat.

And that gets to a bigger issue: to gain a conviction in any of the criminal cases, Justice must prove criminal intent. Legal experts say it's extremely tough to win a case without a whistle-blower to testify about conniving conversations. Internal memos or spreadsheets and charts tend to confuse jurors. "Were these mistakes, or were they done with intent to defraud the public?" asks Alan Bromberg, a securities-law professor at Southern Methodist University in Dallas. "It's a very elusive kind of distinction."

Winning a conviction is even tougher if independent auditors or outside lawyers have signed off on the accounting methods in question. Although in theory compliance with GAAP (generally accepted accounting principles) "cannot be used as a cover," says retired Judge Stanley Sporkin, prosecutors have generally ceded the territory to the SEC for civil action, if any at all. As the President himself said in defending his tenure as a director at Harken Energy, "In the corporate world, sometimes things aren't exactly black and white when it comes to accounting procedures." Expect to hear those words echoed by defense lawyers many times.