Charges unlikely for top execs at Enron, WorldCom.

MORE than a year after the two biggest corporate frauds in U.S. history wiped out billions of dollars in assets and workers' pensions at WorldCom Inc. and Enron Corp., the chief executives who led those companies remain free of criminal charges.

Bernard Ebbers, Kenneth Lay and Jeffrey Skilling may never face prosecution, according to former federal prosecutors and securities lawyers.

Federal prosecutors are still investigating Ebbers, the former milkman and bouncer from Alberta, Canada, who over 17 years transformed a small discount telephone company into WorldCom, the second-biggest U.S. long-distance service.

The former chief executives of Enron--Lay and Skilling--are also still under investigation, 19 months after the world's largest energy trader collapsed owing $67 billion to creditors.

"There is a definite sense that the people most responsible will ultimately never be charged," said Robert A. Mintz, a former assistant U.S. attorney and now a partner at the Newark, N.J. law firm McCarter & English, referring to Ebbers, Skilling and Lay.

The former chief financial officers of WorldCom and Enron--Scott Sullivan and Andrew Fastow--have pleaded not guilty to fraud charges. More than a dozen other executives at the two companies have been charged with or pleaded guilty to fraud counts.

Mintz said the lack of publicly known evidence against Ebbers, Lay and Skilling more than a year after their companies collapsed would make it difficult for prosecutors to file criminal charges against the three men without the cooperation of their immediate subordinates, Sullivan and Fastow.

Lack of evidence

Three reports by a former U.S. attorney general, a former director of enforcement for the Securities and Exchange Commission and a former president of the American College of Bankruptcy found evidence of accounting manipulation at Enron and WorldCom. Yet none cited evidence that they said proved Skilling, Ebbers or Lay had committed a crime.

Making any kind of fraud case is difficult for prosecutors because "the mission is to prove someone knew that there was some sort of fraudulent transaction going on and knew that they were doing wrong," said U.S. Attorney James Comey in New York, who is investigating WorldCom. "It's all about proving what is in their head."

Department of Justice spokesman Bryan Sierra declined to comment on WorldCom or Enron.

WorldCom had $103.9 billion in assets when it filed for Chapter 11 bankruptcy July 21, 2002, making it the biggest company to seek court protection in U.S. history. Enron is the second largest. The Houston-based energy trading company had $63.4 billion in assets when it filed for protection Dec. 2, 2001, after restating $586 million in profits.

The collapse of both companies helped trigger a wave of investigations into corporate accounting practices and board oversight as well as passage of the Sarbanes-Oxley Act, signed into law in July 2002, which rewrote U.S. corporate governance rules.

Loss of lobs

The bankruptcies wiped out about 35,000 jobs and more than $1 billion in employee pensions. Shareholders and former workers at Enron say they lost $29 billion. Enron's recovery plan will pay creditors less than one-fifth of the estimated $67 billion they're owed, officials said in July.

Will Thomas, director of the Corporate Accountability Project of the Washington-based Gray Panthers, a social-action and lobbying group, said, "It's unconscionable that charges haven't been brought at this point" against Ebbers.

Marcel Kahan, a securities law professor al New York University School of Law, disagreed, saying that evidence of criminal wrongdoing by the three former executives isn't so clear-cut.

"The question is: If the financial statements are fraudulent, who is responsible for it and what do prosecutors have to show to prove that the CEOs of these companies were in rather than out?" said Kahan. "It's entirely plausible in both of these cases that the prosecutors just don't have the evidence to prove beyond a reasonable doubt."

The investigation of Ebbers has been especially hampered by his former deputy's refusal to cooperate, said John Coffee Jr., director of Columbia University Law School's corporate governance center and a securities law professor.

The only publicly available evidence that Ebbers, Skilling and Lay knew of or directed fraudulent activity at Enron and WorldCom is based on e-mail and voicemail communication, said lawyers, including Mintz and Kahan. Without corroboration, they said, it is circumstantial and won't support an indictment.

Christopher Bebel, a Houston lawyer and former assistant U.S. attorney who also worked as an SEC litigator, said Ebbers, Lay and Skilling "consciously took steps to eliminate or at least minimize documentation which could someday be used against them by prosecutors."

'The source'

Another study for WorldCom's board by attorney William McLucas, a former enforcement director of the SEC. called Ebbers "the source of the culture" that led to billions of dollars in misstated revenue at the company.

The report said there was "compelling evidence" that Ebbers' sale of 3 million shares of WorldCom stock in September 2000 was made "while Ebbers was in possession of significant non-public information." If Ebbers used that information to time his stock sale, securities lawyers said, it might constitute civil, and maybe criminal, insider trading.

Neither report accused Ebbers of a crime.

The McLucas report said that Ebbers and Sullivan were "aware of the use of non-recurring items to increase reported revenues." It describes a voicemail message that Sullivan left for Ebbers in June 2000 at WorldCom regarding monthly revenue, which he called "mon-rev."

"Hey Bernie, it's Scott," according to the voicemail. "This mon-rev just keeps getting worse and worse. The copy, um. the latest copy that you and I have already, has accounting fluff in it. All one-time stuff or junk that's already in the numbers. With the numbers being, you know, off as far as they were, I didn't think that this stuff was already in there.

"We are going to dig ourselves into a huge hole because year-to-date it's disguising what is going on on the recurring, uh, service side of the business."

Ebbers sent a memo to former WorldCom Chief Operating Officer Ron Beaumont three weeks later, McLucas said, directing him to "see where we stand on those one-time events that had to happen in order for us to have a chance to make our numbers."

Ebbers resigned in April 2002 following an 83 percent plunge in WorldCom stock and the announcement of a federal investigation of his company. The same month WorldCom had lent him $408 million.

Federal prosecutors have accused his chief financial officer, Sullivan. of artificially boosting the company's stock price through the alleged misstatement of revenue and expenses. He is scheduled for trial on securities-fraud charges in early 2004.

While Ebbers doesn't face criminal charges, he has been accused of securities fraud in a civil class action suit in federal court in New York.

Sullivan's lawyers, Nathan and Roy Black, as well as Ebbers and his lawyer, Reid Weingarten, did not return calls seeking comment.

Enron's hidden debt

At Enron, chief executives Lay and Skilling presided as Fastow constructed off-the-book partnerships that hid billions of dollars in debt, prosecutors and shareholder lawyers say. Fastow has been indicted, along with several mid-level Enron employees who agreed to cooperate with prosecutors as part of their plea agreements.

Prosecutors haven't publicly cited any evidence of criminal wrongdoing by Lay and Skilling, nor did a report last month by a court bankruptcy examiner, Neal Batson. That report said them was evidence to "conclude that certain senior officers breached their fiduciary duties to Enron by manipulating Enron's financial statements." It did not identify them. The Enron "officers deliberately withheld information from Enron's accountants that would have precluded the accounting treatment the officers desired."

Skilling helped create some of the partnerships--or "special-purpose entities"--that helped Enron hide debt and boost revenue, according to e-mails and sworn statements by Enron employees, Batson said. Skilling "actively participated in discussions regarding SPE transactions."

Other e-mails and statements show that Lay and Skilling knew of tax transactions used to artificially boost Enron's financial performance, Batson said.

The WorldCom voicemail and the Enron emails are, without corroboration, circumstantial evidence that's insufficient to support an indictment, said Kahan and Mintz. First, prosecutors would have to prove the defendants had actually read or heard the messages.

"You wouldn't want an entire case to be based on a voicemail message that could be interpreted many different ways," said Mintz, the former prosecutor. To prove charges of securities fraud against Skilling and Lay, prosecutors must show they intended to break the law.

Of the three former chief executives, Lay may be the hardest to convict, said Coffee, the Columbia Law School professor. That's because Lay returned to Enron as chief executive just four months before the company filed for bankruptcy.

"He more than others has the argument that when he came back he didn't know anything," Coffee said. Also, Coffee said, Lay bought stock rather than selling it.

Lay's lawyer, Earl Silbert, did not return calls. Skilling's lawyer, Bruce Hiler, said the government should publicly exonerate his client because no indictment has been handed up. Fastow's lawyer, John Keker, did not return calls seeking comment.