Chicago Tribune

CHICAGO – Out of prison and free of her monitoring bracelet, Martha Stewart is setting a new standard for post-conviction corporate comebacks.

Shares of her Martha Stewart Living Omnimedia have soared in recent months as the jailbird-cum-trendsetter has vaulted back into the mainstream entertainment world. With a daytime talk show that debuted in mid-September and a prime-time “Apprentice” series that launched Sept. 21, Stewart is riding high – and she’s not alone. Although criminal convictions typically spell financial ruin for white-collar defendants, the recent government crackdown on corporate crime has yielded some conspicuous exceptions.

Some notable felons are going directly from federal custody back into the corporate suite, collecting rich compensation along the way. Critics say restoring these criminals to positions of authority within their public companies undermines the deterrent of incarceration.

“It sends a message there are certain criminal acts you can get away with doing without having a denigrating effect on your career,” said Paul Hodgson, senior research associate at the Corporate Library governance group.

But Hodgson and others say each case needs to be reviewed individually, and it could be appropriate to hire back a felon so long as day-to-day operation of the company is out of their purview.

Stewart, who lied to federal authorities investigating a stock-market scam, is now collecting a base salary of $900,000, plus a bonus of up to 150 percent and a $100,000 expense allowance. Talent fees for her TV appearances amount to additional hundreds of thousands.

Convicted stock swindler Steven Madden, whose shoe company welcomed him back from prison this year, has bagged a salary of $600,000, with a $200,000 expense allowance, 2.5 percent of revenues from new ventures and a 10 percent cut of certain licensing deals. The company had been paying him an annual salary of $700,000 while he was incarcerated.

In Oregon, Fog Cutter Capital Group took the aggressive step of giving its former chief executive a big boost in compensation on his way to the Big House – prompting the Nasdaq market to delist its shares.

The publicly held real-estate firm funneled $4.6 million to Andrew Wiederhorn in 2004, the year he went to prison for filing a false tax return and paying an illegal gratuity. The payout included a special $2 million “leave of absence agreement” that was used to cover the restitution he owed for his offenses. This year, the company is paying him $1.8 million, although he is scheduled to remain in prison until Nov. 22.

In all three cases, the criminals involved were founders deemed by their companies as indispensable to future success. Corporate spokesmen describe Stewart as “incredibly valuable,” Madden as “an inspiration,” and Wiederhorn as a “creative genius.”

While pay deals such as theirs might be expected to invite outrage and legal action from at least some shareholders, others say a felon may be just the right fit for certain high-profile corporate jobs.

Jim Mitarotonda of Barington Capital Group, an influential owner of stock in Steven Madden, for instance, said the prodigal founder has added significant value since rejoining the company.

Once Madden was released to a federal halfway house in April, after more than two years in prison for manipulating initial public offerings, “I found him to be a real positive for the business,” Mitarotonda said. “My sense is that Steve has learned from the mistake he made in the past.”

In Madden’s case, the Securities and Exchange Commission has barred him from serving as a director or officer at any public company. Instead of returning to his company in his previous role as chief executive, Madden observed the SEC restriction by becoming “creative and design chief.”

Similarly, Stewart came back to her company as “Founder,” a nonofficer job, although the SEC’s petition to bar her from director and officer posts remains unresolved.

Some see the potential for subterfuge in those shifting titles, including David Ruder, a Northwestern University law professor and former SEC chairman.

“The danger for the company is that these people become de facto executives, and can do bad things again,” Ruder said.

“You would want to make sure the person is not in a position to repeat the offense.”

Even so, Ruder sees an important distinction between a “blatant” thief like Scott Sullivan, the chief financial officer instrumental in looting WorldCom, and criminals like Stewart who did not steal from the companies where they worked. “She’s a different case,” he said.

Fogcutter, for instance, decided to pay Wiederhorn’s restitution and other compensation because its directors “did not regard his crime to be serious, and it had nothing to do with Fogcutter,” said Lanny Davis, a spokesman for the company’s board. “If Mr. Wiederhorn had been guilty of intentional misconduct involving financial fraud at this company or any other, he would have been fired on the spot.”

For Lance Caldwell, a federal prosecutor who negotiated the plea agreement that sent Wiederhorn to prison last year, Fogcutter’s support of its convicted executive came as a surprise.

“The money was transferred from the company to his attorney’s trust account and used to pay his restitution just before the plea,” Caldwell said. “We were unaware he was planning to ask his board for that.”

The incident shows that Fogcutter directors have failed to recognize the severity of the tax and gratuity offenses that Wiederhorn admitted, Caldwell said. “They’re both serious crimes. They’re both felonies.”

Without question, such generous institutional support is far from the norm for convicted executives. “Most corporate officers become unemployable,” said John C. Coffee Jr., a Columbia University law professor. “For most professionals, your career is over.”

Gary Zeune runs a speaker’s bureau for white-collar criminals, who typically aim to make a little money by relating their downfalls and offering tips on how to stop thieves such as themselves. His Web site, www.theprosandthecons.com, features smiling photos of “con speakers,” such as a financial whiz who “fooled the auditors” and a former lawyer who complains of “post-crime traumatic syndrome.”

While “none of them make what we would call a living at this,” Zeune said, the prospects for other employment are pretty thin.

The typical corporate offender is “not going to be allowed back in,” he said. “It’s just not worth the risk. There’s too much talent out there to have to resort to a convicted felon.”

The lucky ones emerge from prison with their fortunes largely intact, which provides greater opportunity for staging a comeback. Stewart, Madden and Wiederhorn retain significant ownership stakes in their companies, despite their convictions.

Perhaps most famously, 1980s junk-bond king Michael Milken, who pleaded guilty to six felonies, transformed himself at great expense into a social activist and philanthropist after the Bureau of Prisons finished with him in 1993.

As Coffee put it: “If you come out with wealth, you can translate it into power.”

The success of some prominent felons raises an obvious question: Is the stigma of criminal conviction wearing off?

Steven Madden coyly referred to the return of its founder in a series of posters and print ads. Stewart has gotten enormous publicity from her prison time, and kicked off her daytime talk show with a reference to her convict past: “I am unfettered. I’m free!” she announced. “No ankle bracelet!”

Chicago lawyer Greg Jones, a former first assistant in the U.S. Attorney’s office, thinks the stigma depends on the offense.

White-collar criminals who rip off the little guy bear much more of a burden than those who cheat on their taxes, he said. And, in his estimation, white-collar offenses don’t compare to street crimes in the realm of public shame.

“The closer you get to a traditional crime like rape and murder,” he said, “the more stigma you get.”