In this article, NY Times business columnist Floyd Norris notes the common defense that the various indicted CEO’s of the business world are using these days to defend themselves against criminal charges — i.e., that the executive was “honestly ignorant” of the wrongdoing that was occurring at his company and that any false statements that he made were the unintentional result of his subordinates misleading him.
Or, as it is sometimes referred to in hard-knuckled legal circles, the “honest idiot defense.”
The honest idiot defense does not attempt to deny that misconduct occurred. Rather, the defense focuses on avoiding liability by contending that the defendant’s good faith ignorance prevents the government from establishing the requisite mens rea (intent) to convict the defendant of a crime. As you might expect, honest ignorance is not the easiest thing to get a jury to believe in defending a high-powered business executive.
Nevertheless, as this Wall Street Journal ($) article reports, the honest idiot defense is going to be front and center in the upcoming criminal trial of former Worldcom CEO, Bernard Ebbers. The Ebbers criminal case has many fascinating aspects, not the least of which is the yin-yang relationship between Mr. Ebbers and the government’s chief accuser against him, former WorldCom CFO Scott Sullivan. But the most interesting aspect of the case surely will be the way in which Mr. Ebbers “good ol’ boy” persona plays with the jury in the presentation of the honest idiot defense. And make no mistake about it, Mr. Ebbers will portray himself as the good-hearted dunce (he used his background as a gym teacher and motivator to apply high school basketball coaching techniques to management issues at WorldCom) in comparison to the sophisticated and well-educated Mr. Sullivan.
Another interesting aspect of the Ebbers criminal trial is that the government does not have the typical paper trail of fraud that it has used in most recent business fraud cases, notably the Arthur Andersen prosecution. Turns out that “country boy” Mr. Ebbers did not like computers and so he eschewed using e-mail to communicate with others at WorldCom. Moreover, iansmuch as Mr. Ebbers did not enjoy either reviewing or preparing written materials, he communicated orally with subordinates almost entirely. He did not even use voice-mail. Consequently, without the usual paper trail, the case may well come down to a swearing match between Messrs. Ebbers and Sullivan, which will also be impacted on how well Mr. Ebbers can present himself to the jury as a lovable dunce who the WorldCom sharpies manipulated.
Finally, it will be interesting to see if the Ebbers defense team raises the fact that Mr. Ebbers did not voluntarily sell much, if any, of his WorldCom stock after the bubble burst in the telecommunications industry in 1999. Ebbers’ defense lawyers may reason with the jury that, if Mr. Ebbers really masterminded an elaborate fraud at WorldCom, then why did he not sell his WorldCom stock before the stock price collapsed? Rather than getting out rich (by way of comparison, Mr. Sullivan dumped almost $30 million of WorldCom stock in 2000), Mr. Ebbers went from being a billionaire to being so deeply in debt that personal bankruptcy appears inevitable. When the price of WorldCom stock began to plummet, margin calls forced Mr. Ebbers to sell one big slug of stock, but then he persuaded WorldCom’s compliant board to stave off further margin calls by having WorldCom guarantee his loans that were secured with WorldCom stock. The financial result of those transactions is that the now insolvent Mr. Ebbers owes WorldCom more than $300 million, but savvy defense attorneys may be able to present the scenario to the jury as further evidence that Mr. Ebbers really thought that WorldCom would rebound and simply did not understand the dire financial condition.
Despite the obvious differences between the two men, that’s why former Enron chairman and CEO Kenneth Lay and his attorneys will be watching the Ebbers criminal trial very closely.