Thursday, January 6, 2005
In the Jan. 5 post "The 'Honest-but-Ignorant' CEO Defense" that discusses the likely defense that will be offered by Ken Lay (Enron) and Richard Scrushy (HealthSouth), I neglected to include Bernie Ebbers to the list of former CEOs who will argue that they relied on subordinates to handle accounting issues. Ebbers, the former CEO of WorldCom (now MCI after the largest bankruptcy in history), is scheduled to go on trial in the Southern District of New York on Jan. 19, when jury selection starts, for securities fraud related to the company's improper capitalization of expenses (now doesn't that get the juices flowing). An article in the Wall Street Journal (Jan. 6) about the settlement of a civil securities fraud action by 10 former WorldCom outside directors also discusses the pending Ebbers trial. According to the article, "Mr. Ebbers, 63 years old, is expected to argue that he was never an accounting expert, and that he relied in good faith on those who were, including former Chief Financial Officer Scott Sullivan, who has pleaded guilty to fraud."
One aspect of the Ebbers trial that will be interesting is that, according to earlier reports, Ebbers completely avoided using e-mail to communicate with others in the company, which denies the government a source of information that has been a boon to its corporate fraud and obstruction of justice cases the past few years (e.g. Arthur Andersen, Frank Quattrone). Ebbers apparently refused to review written materials and only communicated orally with subordinates, not even using voice-mail. The usual paper trail in a fraud case may be missing here, and the trial could come down to whether the jury believes Sullivan or Ebbers. Ignorance without a paper trail may be bliss. (ph)