Fraud-Busting on the Kansas Plains

 

Westar Energy consumed more than two years of Hathaway’s time. The trial transcripts in federal court run to thousands of pages. The first jury hung. The second convicted the principal defendants, former CEO David Wittig and former executive vice president Douglas Lake, with Wittig receiving 18 years and Lake 15 years. Both sentences are on appeal — although Wittig is now serving time in a minimum-security prison in Minnesota on a related bank fraud case.

 

“Basically the case amounted to corporate fraud of a criminal nature,” Hathaway says. Wittig and Lake, documents show, awarded themselves mammoth compensation packages — questionable to the Westar board of directors and the stockholders. So, too, was the use of the company’s airplanes, including an intercontinental private jet for things like a European business trip that bore an amazing resemblance to a vacation.

 

What Hathaway, his investigators, Westar’s lawyers and the grand jury saw as even more dubious were the interlocked loan schemes, plus a plan to spin off part of Westar and billions of its debts into a separate company called Westar Industries, worth nearly $3 billion (Enron’s splitmerge scams were similar).

 

Part of the proposed deal could have directed $65 million to Wittig and $35 million to Lake, “by virtue of ‘change-in-control’ provisions,” according to court documents. To make all this happen the Westar execs wanted to bypass the Kansas Corporation Commission by obtaining, with U.S. congressional help (they illegally contributed money to Tom DeLay), an exemption for the new Westar entity from virtually any local, or even national, regulation.

 

The legal drama began in earnest in 2002.

 

“[Wittig and Lake] were seeking to line their pockets at every turn,” Hathaway says. “The shareholders were getting screwed. The company stock went from the mid-$20 range down as low as about $8.” Now the company is back on track with new management and, as of this writing, Westar Energy stock stood at nearly $24 per share.

 

The complicated wheeling and dealing of the Westar executives needed to be thoroughly researched and boiled down for the jury. Hathaway was the man for the job, as Jim Flory, First Assistant U.S. Attorney for Kansas, said to the Kansas City Pitch. “Generally, in complex litigation, the key to success is preparation and organization. And [Hathaway] adds to that a very solid courtroom demeanor.”

 

Hathaway doesn’t brag or swagger, but he’s enough of a plainsman to detest cheaters and frauds. He’s a native Kansan, born in Topeka. His law degree is from Washburn University in Topeka. He started his career in Hutchinson, Kan., as city prosecutor and assistant Reno County Attorney. In 1975, he was appointed as an assistant U.S. Attorney and assigned to Kansas City, Kan. He departed from the federal system in 1978 to enter private-sector practice, specializing in product liability defense work, where, he says, “I learned a lot about corporate behavior.”

 

Since returning to the federal system in 1985, Hathaway has won dozens of awards and commendations from his peers in the Kansas District; the FBI; the Alcohol, Tobacco and Firearms Agency; the Department of Housing and Urban Development; even from former U.S. attorney general John Ashcroft. All involved Hathaway’s work against fraud.

 

Westar isn’t the only high-profile fraud case Hathaway has prosecuted. A man named Douglas O. Ruedlinger concocted an insurance company designed to reimburse high school athletes for injuries, particularly football injuries, while shielding their schools from lawsuits. The insurance plan spread to more than 30 states, although more than half were not authorized by the underwriter. The scheme by Ruedlinger, like many win-win offers, seemed simple. For $1 per student (eventually 18,000 schools signed on with about 8 million students insured) the company would pay for medical expenses. Unfortunately, the money to sustain payments wasn’t there, so the company went belly-up and filed for Chapter 7 bankruptcy. Paralyzed and brain-damaged student athletes were left without insurance money.

 

As the case unfolded, Hathaway and his team uncovered several nefarious corporate ploys. Corporate jets. Companies and bank accounts, foreign and domestic, spun off from the core business, leaving reinsurance companies to face lawsuits and pick up liabilities. Ruedlinger “stole, embezzled, converted and misapplied” his various revenues, according to the charges. Hathaway earned special commendations from the FBI and IRS for successfully prosecuting that case. But, along with the praise, Hathaway has drawn criticism.

 

The Pitch likened his aggressive courtroom manner during the Westar trial to something out of a John Grisham novel. True, Hathaway brought one of Wittig’s co-defendants to tears on the stand. Hathaway says of the witness (who is now serving time), “His prior statements about questionable loans were the beginning of the unraveling of the fraud case,” thus explaining his unrelenting examination of the man.

 

Hathaway doesn’t dwell much on those complaints. “Nothing upsets me that’s said about me,” he says. “Prosecutors develop the hide of an elephant. A good prosecutor follows the evidence wherever it leads and presents that in court. Pretty simple job, really.”

 

In the Westar trials, according to many observers, the behavior of the defense’s East Coast attorneys wasn’t exactly good form. The U.S. district judge frequently admonished them and once threatened to banish some from the courtroom unless they behaved according to her standards.

 

“They were just bad,” Hathaway says. A defense attorney from New York was chastised by the trial judge and told to have no contact with Hathaway because the judge perceived that the attorney was “threatening” Hathaway (that defense attorney, Edward J.M. Little, says Hathaway was the one doing the threatening. “I have not one word to say about Rich Hathaway,” he says).

 

But Pedro Irigonegaray, another leading defense attorney in the case, praised Hathaway, saying, “I’ve known him since 1968, and we’ve gone at each other in court with great gusto, but he’s a good man who does his best to represent the U.S. even if, from my perspective, he doesn’t always represent the right side.” Irigonegaray adds, “Rich wins within the law. We’re always just a handshake away from each other.”

 

Currently, the Westar matter rests with the 10th Circuit Court of Appeals in Denver for a September hearing. Pending the opinion, Hathaway will pursue his several other cases, some involving health care fraud. When the day’s work is done, he’ll leave his office and the conference room with its row of oversized law enforcement badges on the walls. He’ll go home, perhaps call his two grown children to chat or indulge his interest in Native-American art. More likely, he’ll wind up thinking out his next case and making a plan for the hard work ahead. Not that he sees it as work, exactly.

 

“I don’t hunt or fish or shoot pool,” Hathaway says. “Not right now. My work is my fun.”