A few years ago, America's high-flying CEOs wanted everyone to think they were hands-on executives who knew everything that was going on -- super-human masters of the universe who didn't suffer fools and whom no one could fool. Well, times have changed. Some CEOs these days would rather people think they didn't know much of anything that was going on -- especially if they stand accused of masterminding a major corporate fraud. But will they get away with it?
The trial of Bernie Ebbers, the former chairman of WorldCom, is now moving into high gear in a Manhattan courtroom. Ebbers is charged with being the ringleader of a record $11 billion accounting fraud that resulted in the largest bankruptcy in American history and cost lots of workers and investors their shirts. Ebbers' defense is that he didn't know anything about it. It was all done by underlings who never told him what they were up to.
Regardless of what Ebbers knew, the collapse of WorldCom in July of 2002 finally moved Congress and the president to try get CEOs to know more. Days after WorldCom declared bankruptcy, the Sarbanes-Oxley Act was passed. It requires, among other things, that CEOs sign a statement certifying that their company's books are accurate.
Will it work? That depends on what happens in another courtroom -- this one in Birmingham Alabama.
There, Richard Scrushy stands accused of masterminding a multi-billion dollar fraud at his former company, HealthSouth. Not surprisingly, Scrushy says he didn't know about it -- it was all done by underlings who never told him what they were up to. But the difference between Bernie Ebbers and Richard Scrushy is that the fraud at HealthSouth occurred after Sarbanes-Oxley was enacted. In August 2002 and then again the following November, Scrushy certified that HealthSouth's books were just fine.
So if Sarbanes-Oxley has any teeth at all, Scrushy's I-didn't-know-about-it defense will be harder to pull off than Ebber's. Presumably, the new test isn't whether a CEO did or did not know about a fraud. If he certified that his company's accounts were true and it turns out they weren't, the presumption is he did know. He had a duty to know.
But exactly how Sarbanes-Oxley is interpreted -- what level of proof will actually be required in order to send a CEO to prison for criminal fraud -- will be up to judges and juries. That means Richard Scrushy's trial in Birmingham is about more than Richard Scrushy. It's the first test of Sarbanes-Oxley, and it's likely to set an important precedent. How that case comes out will help determine whether CEOs in the future will know what they should know.
Robert B. Reich is cofounder of The American Prospect. A version of this column appeared on Marketplace.
