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Accused execs going for plea deals

If federal prosecutors have their way, drug lords, Mafia dons and mass murderers could be welcoming some new members to the 30-years-to-life club: top executives accused of cooking the books at companies such as Homestore Inc.

The plea agreements that two executives of Westlake Village-based Homestore struck recently with federal authorities spell out the stark alternative they would have faced at trial: a slew of fraud and conspiracy charges that, according to a tally by prosecutors, could have resulted in a mandatory life prison sentence.

Instead, Joseph J. Shew pleaded guilty to one count of conspiracy, and John M. Giesecke Jr. pleaded guilty to one count of conspiracy and one count of fraud, capping their potential sentences at five and 10 years, respectively. They are cooperating with investigations of Homestore higher-ups and business partners who, they contend, conceived and approved illegal accounting schemes in 2000 and 2001.

Even though the plea agreements still hold out the prospect of serious jail time, defense attorneys say these kinds of deals are becoming harder to turn down as federal officials, using tough new sentencing rules, threaten targets in corporate scandals with prison terms of 25 years, 30 years or more.

"It's like bombers coming in," said a lawyer for another former executive who could be charged in the phony-revenue case at Homestore, which puts home-sales listings and related information on the Internet. "You just look at these numbers and it really does the government's work for them, even if your guy has a strong defense."

Change in Attitude

Prosecutors said the trend toward taking a tougher stance on corporate fraud cases began in the late 1990s, encouraged by former Securities and Exchange Commission Chairman Arthur Levitt. It intensified as the stock markets declined beginning in 2000. And it kicked into high gear as the wave of corporate accounting scandals broke over the last year, according to Gregory J. Weingart, chief of the major frauds unit at the U.S. attorney's office in Los Angeles.

Weingart said his unit has handled about a dozen corporate-corruption investigations this year, compared with just one or two annually in the mid-1990s. And a Justice Department corporate-fraud task force formed last July includes seven U.S. attorneys from offices around the country, including Debra Yang in Los Angeles.

"There's no question that U.S. attorney's offices around the country that once were reluctant to take our cases are no longer" reluctant, said Randall Lee, who became head of the SEC's Pacific regional office in Los Angeles in 2001 after seven years in the criminal division of the U.S. attorney's office in L.A.

It's an attitude that comes from the top. In recent months, U.S. Atty. Gen. John Ashcroft has pushed for "real-time enforcement" of fraud laws, with U.S. attorney's offices, the SEC and other agencies combining "to end criminal activity before jobs, investments and assets are squandered," as he put it in a Sept. 27 speech.

At a recent securities-law conference in Los Angeles, Giesecke's defense attorney, Jan Handzlik, said the potential sentences for fraud "can be quite staggering" for executives, including for "some of my clients, who didn't realize they were going to be subjected to this."

At the same conference, Weingart told the audience of securities lawyers, regulators and prosecutors: "A top executive could get 30 years to life under the new rules."

The alternative, he said, is to plead guilty to charges carrying a lower maximum sentence and cooperate with authorities.

Critics complain that the extreme potential penalties will force defendants into making guilty pleas when they're innocent.

"You're going to get people buying themselves out of these long jail terms by perjury," said veteran Washington defense lawyer Robert Bennett, whose clients have included former President Clinton and Enron Corp. "It's their only way out."

Federal sentencing guidelines in fraud cases have been toughened over the years and were given a dramatic boost last year, especially in cases in which financial losses are large.

On the sentencing scorecard, for instance, a basic fraud with a loss of a few thousand dollars would indicate a sentence with no jail time for first-time offenders such as Shew and Giesecke.

But after adjustments for factors such as abusing public trust, victimizing more than 50 people and, especially, for costing Homestore shareholders more than $100 million, the sentence mandated by the guidelines is life in prison — although it drops to the 25-to-30-year range for acceptance of responsibility and could be lowered by other considerations.

Defense attorneys say prosecutors in major corporate corruption cases are proposing plea agreements containing 15-to-20-year sentences in negotiations with top executives who the defense contends never had any intent to commit crimes.

"What worries me is that there will be some white-collar guys who won't plead to an agreement like that, go to trial and get a 30-year sentence they don't deserve," Bennett said. "These draconian sentences heretofore have been reserved for the worst of the worst — drug kingpins and multiple murderers."

The potential penalties were far lighter during the last wave of high-profile insider-trading and bank-fraud prosecutions in the 1980s and early 1990s.

Ivan F. Boesky, the central player in Wall Street's insider-trading scandals of the '80s, settled his case by paying $100 million in penalties, pleading guilty to one felony and serving two years at the federal prison camp in Lompoc, Calif.

That sort of deal was the norm in white-collar frauds before the sentencing guidelines took effect in 1987, noted Sandra Jordan, a University of Pittsburgh criminal-law professor and former white-collar prosecutor. Even for defendants convicted of 20 fraud counts with a maximum 100-year sentence, "you rarely saw anyone get anything like five years," Jordan said.

That slowly began to change by the early '90s, when Charles H. Keating Jr. was convicted in state and federal court of looting Irvine-based Lincoln Savings & Loan, costing taxpayers $2.9 billion and Lincoln's mainly elderly depositors $285 million. Keating, whose convictions were overturned, served less than five years of his federal prison sentence of 12 years and 7 months.

"We thought the deck was stacked against defendants then, but it's nothing compared to what we have now," said Keating's attorney, Stephen C. Neal.

And given the anger over executives who grew rich while shareholders and employees were devastated at companies such as Enron, "no one is going to temper it any time soon," Neal added.

Judges' Discretion

Legal experts say judges, though limited by the guidelines when defendants lose at trial, may find ways to reduce overly harsh sentences by citing health and family concerns, aberrant behavior and effects on innocent employees. The U.S. 9th Circuit Court of Appeals, which reviews California decisions, has been especially willing to accept such "downward departures."

What's more, judges have wide leeway when prosecutors recommend sentence reductions based on the cooperation of defendants who accept plea agreements, Weingart pointed out.

Defense attorneys say they often try to tailor those agreements so their clients admit to tax or other charges stemming from the fraud, but with far lighter sentences.

That was the case for John DeSimone, a relatively minor former Homestore financial executive, who pleaded guilty to making $170,000 selling Homestore stock though he knew the company's financial statements were inflated. If he cooperates to the satisfaction of prosecutors, DiSimone could be sentenced to home confinement or probation.

Meanwhile, legal experts will be watching closely for unusual deals such as the one worked out with Michael Milken, the controversial junk bond king.

Milken pleaded guilty to securities violations in 1990 and was sentenced to 10 years in prison. But because of provisions in his cooperation agreement with prosecutors, he spent less than two years in custody in a minimum-security prison and a halfway house in Hollywood.

It's unlikely that today's violators will see their sentences reduced to that extent, because so many loopholes have been closed, said Handzlik, Giesecke's attorney.

"The options that were provided by the sentencing laws then are no longer on the table," Handzlik said. "There won't be any escape clauses."

Copyright © 2014, The Baltimore Sun
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