Sue Them, Jail Them, Make Them Pay for Meltdown: Ann Woolner

Commentary by Ann Woolner

Sept. 19 (Bloomberg) -- As it stands, the rest of us will be paying much money over a long time for the greed and bad judgment of those who melted down the economy.

Hundreds of billions of taxpayer dollars are propping up firms that a relative few money lenders and Wall Street wizards ruined.

If that weren't enough, the crisis is shrinking the money that Americans diligently socked away for retirement, down payments on first homes, college for the kids or this winter's heating bill. We might as well have opened our windows and tossed out cash.

Beyond crimping living standards around the globe, the crumbling of the U.S. financial system has prompted action radical for a nation devoted to free enterprise. However necessary, it's nothing short of astounding that the U.S. government essentially nationalized the largest insurance company in the country.

The real kick in the teeth is that the executives who inflicted all this financial pain, who forced unprecedented government takeovers, walk away with hundreds of millions of dollars. It's up to us -- innocent little us -- to dig into our pockets, into our futures and into our children's futures to fix their spectacular errors.

Stanley O'Neal took a $161 million package last year when he left Merrill Lynch & Co. (remember Merrill Lynch?), even without a severance package in the mix. Angelo Mozilo, founder and top executive at Countrywide Financial Corp., reaped almost $122 million during 2007 in stock options alone.

For a mere three months at the helm of American International Group Inc., Chief Executive Officer Robert Willumstad gets a $7 million package.

Selling Stock Options

And while the value of Richard Fuld's shares in Lehman Brothers Holdings Inc. plunged roughly $1 billion, he still pulled in almost $490 million by selling options and share grants in the 14 years that the company's been public, according to Fortune magazine.

We now know those shares were grossly overpriced, resting as they did on subprime mortgages. Shouldn't he give back most of it? All of it?

At least the government is blocking the $24 million given to the fired top guns at Fannie Mae and Freddie Mac, both taken over earlier this month.

As a rule, it isn't easy to take back money or benefits awarded as part of an employment contract, unless you can figure out some way the executive violated the contract's terms.

But it's worth a try. Consider these options.

Toss the rascals in jail. Criminal prosecution allows the government to seize ill-gotten gains. Snip the straps off those golden parachutes and grab them. Take over bank accounts, investment accounts, mansions, private planes and yachts.

Bear Stearns

The feds did bring charges against a couple of Bear Stearns Cos. hedge fund managers in June, and Federal Bureau of Investigation Director Robert Mueller told Congress this week his agency is pursuing possible suspects ``as far up the corporate chain as necessary.''

The hitch is that proving executives lied in criminal ways is easier said than done, Enron and WorldCom convictions notwithstanding.

``Criminal prosecutions need to be specific, detail-oriented fact patterns where clear-cut criminality can be established,'' says Robert Mintz, a white-collar criminal defense lawyer and former prosecutor.

``These are broad, sweeping market failures that have swept up so many individuals and so many institutions that prosecutors will have a hard time singling out any entity, much less any institution, and hold them responsible,'' says Mintz, a partner in McCarter and English in Newark, New Jersey.

OK, so file civil suits.

Sue the Directors

WorldCom shareholders sued and wrangled $18 million from the pockets of directors, who agreed to pay more than 20 percent of their combined net worth. Another $36 million came from the directors' insurance carriers.

These days, collecting from an insurer might not be the best idea. If AIG is doing the insuring, it would be the taxpayers paying out.

William McGuire, former CEO of UnitedHealth Group Inc., agreed this month to personally cough up $30 million to resolve a lawsuit over stock-option backdating. That's on top of the $600 million in benefits -- mostly in stock options -- he said he will turn in to resolve another shareholder suit.

The problem is that it normally takes something akin to criminal conduct, such as options backdating or accounting fraud, for civil suits to take money out of the hands of the accused. And, as previously noted, it isn't clear we will have that here.

Stricter Regulation

Well, what about government regulators? The U.S. Securities and Exchange Commission didn't do anything to prevent this meltdown. But at least, with New York Attorney General Andrew Cuomo leading the charge, federal and state regulators have forced investment banks to buy back billions of dollars worth of auction-rate securities said to have been sold under dubious claims of reliability.

The bankruptcy law may give Lehman Brothers creditors a chance to grab some of the bonuses the firm paid out last year.

If they can show bonuses were based on bogus claims of solvency, they can go after them, according to compensation expert Paul Hodgson of the Corporate Library, which analyzes corporate governance issues.

Some plaintiffs' lawyers apply the same principle when pushing for tougher corporate governance rules as part of settling a case.

The idea is that CEOs and CFOs who drew bonuses based on earnings that had to later be restated, for whatever reason, must automatically return the excess amount, according to Darren Robbins, a partner in Coughlin Stoia Geller Rudman & Robbins.

Frankly, it's only fair.

(Ann Woolner is a Bloomberg news columnist. The opinions expressed are her own.)

To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net.