Corporate Crimes & Prison Sentences

June 14, 2006

A brief summary of recent criminal investigations of corporations and their leaders, with special attention to Enron executives Kenneth Lay and Jeffrey Skilling.

To the Teacher:

Below is a brief summary of recent criminal investigations of corporations and their leaders, with special attention to Enron executives Kenneth Lay and Jeffrey Skilling. Questions and suggestions for further inquiry follow. A more extensive exploration of this issue (written in 2002) can be found on this website: "Infectious Greed: Corporate Chicanery & White-Collar Crime: Three Lessons for High School Students." Teachers may also find useful "Analyzing the Enron Debacle," also on this website.

 


Student Reading:

Crimes & Prison Sentences

On May 25, 2006, Kenneth Lay and Jeffrey Skilling, former chief executives of the Enron energy company, became the most prominent corporate leaders to be convicted for an array of high-level business crimes. Lay was found guilty on 10 counts of conspiracy, securities fraud, wire fraud, false statements to banks, and bank fraud. Skilling was convicted on 28 counts of conspiracy, securities fraud, insider trading, and false statements to auditors. Their sentences will be announced on September 11. If they are upheld on an expected appeal, both men could spend the rest of their lives in prison.

"Enron is one of the great frauds in American business history," said James Post, a professor of management at Boston University. "The excesses of Enron point pretty clearly to what was going on in mainstream companies across the business landscape in the 1990's." (New York Times, 5/26/06)

In the case of Enron, these "excesses" included booking false profits and hiding real debt to make the company look good in the eyes of investors. It also included lying to their own employees about the state of Enron's health while they made millions selling their stock.

In their trial, Lay and Skilling's basic defense was that they simply did not know about the illegal acts of their employees. The jury did not believe them. Juror Freddy Delgado, an elementary school principal, questioned how the two men could testify that they "had their hands firmly on the wheel" at Enron and then turn around and say that they did not know about the improper accounting and the company's intensifying financial problems " I can't say that I don't know what my teachers were doing in the classroom," Delgado said. "I am still responsible if a child gets lost." (New York Times, 5/26/06)

Last year Andrew Fastow, Enron's chief financial officer (CFO), pleaded guilty to two felonies and was sentenced to 10 years in prison. As part of his plea bargain, he testified against Lay and Skilling at their trials.

In recent years a number of other top corporate executives have been tried, convicted, and sent to prison for a variety of corporate crimes. A partial list includes:

  • CEO Bernard Ebbers and CFO Scott Sullivan of World Com, the telephone and internet company, went to prison for falsifying their books and securities fraud. World Com went into bankruptcy and was later bought by Verizon.
     
  • CEO John Rigas and his son, Timothy Rigas of Adelphia Communications, a cable provider, went to prison for falsifying their books and inflating the numbers of their customers. The company went bankrupt and was sold to Time Warner and Comcast.
     
  • CEO Dennis Kozlowski and CFO Mark Swarz of Tyco, a conglomerate, went to prison for tax evasion and stealing money from the company.
     
  • CEO Samuel Waksal of ImClone Systems, a manufacturer of bio-pharmaceuticals, went to prison for forgery, destroying records, bank fraud, and insider trading.

A host of energy companies other than Enron have been fined and executives from a number of other corporations indicted and convicted for fraudulent practices. Such huge investment banks as J.P. Morgan Chase and Citigroup that were involved in the Enron accounting scandals have agreed to pay huge sums ($2.2 billion for J.P. Morgan Chase and $2 billion for Citigroup) to investors who lost billions in the Enron bankruptcy.

The scandals continue. The latest is the book-cooking at Fannie Mae, a mortgage-financing giant, involving at least a dozen executives.

In 2002, Congress passed the Sarbanes-Oxley Law, which is aimed at the accounting practices that misled investors and resulted in their losses of billions of dollars and corporate bankruptcies.

For Discussion

  • Why do you think Enron executives Skilling and Lay misrepresented the health of the company to make it look good to investors? What did they achieve by doing this?
     
  • Why do you think Skilling and Lay lied to their employees about the state of Enron's health? What did they achieve by doing this?

For Further Inquiry

Students might conduct a more in-depth inquiry into the particular actions that led to the indictment and conviction of Enron's top executives. For instance, how did Lay and Skilling misrepresent the financial health of their company to their employees? What were the consequences for those employees?

Students might also review other examples of corporate crime included in : "Infectious Greed: Corporate Chicanery & White-Collar Crime: Three Lessons for High School Students." In particular, Dennis Kozlowski's theft of Tyco company funds and insider trading by ImClone Systems CEO Samuel Waksal should be understandable to students.

This essay was written for TeachableMoment.Org, a project of Morningside Center for Teaching Social Responsibility. We welcome your comments. Please email them to:lmcclure@morningsidecenter.org.