Two decades ago, when Enron Corp. was a fledgling natural gas pipeline, Barry Minkow was busy bilking Wall Street and investors out of hundreds of millions of dollars with his ZZZZ Best Co., a sham of a carpet-cleaning company that never made a profit.
Minkow eventually reformed himself as a minister and corporate-fraud investigator, but if he were still a financial crook, "I'd run a carpet-cleaning hedge fund," he offers. "Or you go offshore, baby. It's the latest twist in investment fraud. You get American money without American regulation."
The convictions yesterday of Enron's fallen chief executive officers, Kenneth L. Lay and Jeffrey K. Skilling, were widely described as providing closure to an era of accounting scandals that brought down several companies and executives in recent years. But corporate malfeasance has proved cyclical, often erupting when the stock market is riding high and euphoria trumps vigilance.
Fraud has come in waves, from widespread stock fraud suspected before the 1929 market crash that led to greater regulation of securities, to the insider trading scams of the 1980s, to the savings and loan failures that lasted into the 1990s, to executives and analysts exaggerating the fortunes of dot-com companies later that decade.
Though the next scandal is impossible to foresee, market experts see a number of potential trouble spots, including the hedge-fund world that is lightly regulated but increasingly popular and accessible to everyday investors. Also, with expanding globalization, many investors are looking for the next hot investment overseas where accounting standards vary and U.S. regulators often can't reach.
"This is the end of a chapter, though certainly not the closing of the book on fraud," said John J. Carney, a former federal prosecutor and lawyer specializing in complex financial cases. "Not only will there be new kinds of investments that people manipulate, but the kid in high school today who thinks he'll be immune from this because he's smarter and better will one day be CEO."
Underscoring the endurance of fraud, the Association of Certified Fraud Examiners recently found that U.S. losses from fraud, including corruption, fraudulent statements and asset misappropriation, rose to an estimated $638 billion last year, up from about $400 billion a decade ago.
One of the biggest corporate scandals of late happened at a Stamford, Conn., hedge fund firm, the Bayou Group. According to the Securities and Exchange Commission, fund advisers duped investors and misappropriated millions of dollars. Earlier this month, the agency barred two fund managers from the securities business. Only a portion of the more than $450 million raised from investors has been recovered.
Most hedge fund advisers are now required to register with the SEC, making them subject to periodic audits, although this month regulators told Congress that further regulation might not be needed. Hedge funds, investment pools designed for wealthy investors and institutions, have grown to oversee an estimated $1 trillion. The funds' trading strategies and holdings are often secret.
"That will always be the most dangerous area of the marketplace - those drifting in the unregulated areas that are nonetheless able to raise immense levels of capital," said Christopher Bebel, a former SEC attorney and federal prosecutor.
State and federal regulators also have warned investors about overseas investment swindles involving precious metals, currency speculation and other business opportunities.
Meanwhile, many investors are turning to international investments as a way to diversify portfolios. Most invest through mutual funds that have specialists who scrutinize those markets, though roughly one-fifth of individual investors own stock in foreign companies, according to a study by industry trade groups.
Shortly after Enron imploded, Congress implemented the Sarbanes-Oxley Act, the most sweeping corporate accountability legislation since the 1930s when the Great Depression followed the market's plunge. The law created a new accounting oversight board and required that chief executives and chief financial officers certify a company's financial results.
Enron was the "canary in the mineshaft," said Sen. Paul S. Sarbanes, a Maryland Democrat and co-author of the bill. Revelations of accounting fraud and looting of corporate funds followed at companies such as WorldCom Inc. and Tyco International Ltd. Those executives, like Lay and Skilling, have been convicted on criminal charges.
Jacob Zamansky, a securities lawyer who represents investors, said the criminal cases have sent a strong message after some accounting frauds were punished only with civil fines. Arthur Andersen LLP, the accounting firm for Enron, had previously paid to settle civil - but not criminal - charges and shareholder lawsuits over its auditing at Waste Management Inc. and Sunbeam Corp. Andersen eventually collapsed and was charged criminally in the Enron case.
"You had a culture of corporate executives trying to manage earnings to meet Wall Street expectations. They were very aggressive and fudged the books, and everyone was driven to keeping that stock price high," Zamansky said. "Hopefully, these convictions will break that culture."
The effort by prosecutors to go after top executives also sends a message, said Jill Fisch, director of the Center for Corporate, Securities and Financial Law at Fordham Law School in New York.
"Instead of picking out a couple of low-level scapegoats, the government proceeded all the way to the top and was able to pin responsibility on them," she said after yesterday's verdict. "I think the American public has been waiting for that kind of statement."
Some legal observers said the spate of high-profile prosecutions could have unintended consequences for corporate governance.
Richard A. Booth, a professor of corporate finance and securities law at the University of Maryland School of Law in Baltimore, said the prospect of being criminally liable for a company's fraudulent downfall could be viewed by corporate directors as rationale for boosting CEO pay and by executives as reason to deter risk-taking that has defined American enterprise. "You've got to pay people to take these kinds of risks," Booth said. "But once someone is sitting there in the CEO chair, they may not take the risks that investors want them to take for fear the company goes down. If investors wanted them to be conservative with their money, they would be investing in government bonds."