Getting Tough on Corporate Crime?
Enron and a Year of Corporate Financial
Scandals
Jeffrey Reiman and Paul Leighton
This essay is published by
Allyn & Bacon, and distributed as a supplement to Jeffrey Reiman's
The Rich Get Richer & the Poor Get Prison, 6th ed (2001)
starting in Winter 2003.
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| Company |
Alleged
Wrongdoing |
Status |
Adelphia
The
6th largest cable company declared bankruptcy soon after
announcing it was responsible for $2.3
billion in off-balance-sheet loans to the founding Rigas family.
Investors
lost $60 billion in value when stock fell to $0.15 from a high of $66;
the company has filed for bankruptcy and is restating earnings for the
last several years. |
The
founding Rigas family used the company as their personal bank and allegedly
improperly took money and loans, then created sham transactions and
forged financial documents to cover it up. The
SEC found “rampant self-dealing” including the use of $252 million
in Adelphia funds to repay stock market losses; other company money
was used to purchase $28 million in timber rights, a $12.8 million
golf club, the Buffalo Sabres hockey team ($150 million), and
“luxury condominiums in Colorado, Mexico, and New York City for the
Rigas Family”; the family also used, without reimbursement, 3
airplanes owned by Adelphia, including for a safari vacation in
Africa. At one point, Timothy Rigas grew concerned about his father's
"unacceptably large" spending of company money and put him
on an allowance of $1 million a month. |
John
Rigas, his sons, and two other executives are under criminal
indictment and currently free on bail; they also face SEC fines in
what an official describes as "one of the most extensive
financial frauds ever to take place at a public company." |
Arthur
Andersen
Accountants
and financial consultants. |
Andersen
audited many companies that had to restate earnings in the current
scandals and has settled with the SEC in numerous past cases involving
deceptive bookkeeping: Enron; WorldCom ($8 billion restatement);
Global Crossing; Qwest Communications; Baptist Foundation of Arizona
($217 million settlement); Sunbeam ($110 million settlement); Colonial
Realty ($90 million settlement). The Waste Management case ($1 billion
overstated earnings) led to an SEC settlement of $7 million, a $229
million shareholder settlement and an SEC “cease and desist” order
on misleading accounting.
Andersen
officials ordered the shredding of important Enron documents after an
SEC investigation started. To help dispose of 30 boxes of documents,
Andersen called a company named Shred-it, whose motto is “Your
secrets are safe with us.” Andersen also deleted large numbers of
emails relating to its internal debates on Enron’s financial
problems. |
Andersen
was convicted of obstruction of justice in June and admitted to
expediting the shredding of documents. The firm will cease auditing
public firms by Aug. 31, 2002, although it will continue to do
financial consulting. |
Enron
Described
by executive Skilling as “the world’s coolest company,” Enron
declared the largest corporate bankruptcy in history, Dec 2, 2001. It
restated its earnings and assets downward by $1.5 billion, wiping out
4,200 jobs and $60 billion in market value lost to shareholders.
See also Enron and the Bush Administration The Collapse of Enron: A Bibliography of Online Legal, Government and Legislative Resources |
A
special committee of Enron's board (The Powers Committee) concluded
that partnership arrangements allowed high-level Enron executives to
hide Enron's losses and liabilities, while earning tens of millions of
dollars in fees for themselves. The report was based on a three month
review without subpoena power or access to many documents.
Nevertheless, it "found
a systematic and pervasive attempt by Enron's Management to
misrepresent the Company's financial condition" and that Enron
employees involved in the partnerships received “tens of millions of
dollars they should never have received."
Investigations
conclude that Enron manipulated the California power crisis for
financial gain, entered into transactions presenting conflicts of
interest, engaged in fraudulent transactions to book revenue, and
punished whistleblowers and those who questioned the appropriateness
of business transactions and practices.
Enron
executives and directors sold $1 billion worth of shares in the three
years before the company collapsed. While executives were selling off
shares just before the bankruptcy announcement, employees were locked
out of selling their shares because of “administrative changes” to
the stock plan.During
this period, Enron stock lost 28% of its value. Ken Lay took $19
million in cash advances during this time, which he repaid with Enron
stock that was rapidly losing value.
UPDATE: The Justice Department in 1999 declined to pursue a criminal referral from the Internal Revenue Service of possible bribes paid by Enron Corp. officials to Guatemalans close to former president Jorge Serrano to win a lucrative electric-power contract, according to a congressional investigation to be made public today.
The payments identified by the Senate report "were disguised as add-on fuel charges to conceal them from U.S. and Guatemalan tax authorities," the congressional report states.
(Justice Rejected IRS Call for Enron Probe,
Washington Post, July 29, 2003; Page E01)
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Three
British bankers have been indicted because of Enron related fraudulent
transactions amounting to $7.3 million (although they are still in
Britain).
Fastow
protégé Michael Kopper pleaded guilty to conspiracy to engage in
money laundering and wire fraud charges; he agreed to cooperate with
prosecutors and return $12 million.
On
Sept 3, 2002 Lay’s lawyers feared the SEC “may soon move to freeze
his assets” but it had not happened yet.
Although
a criminal investigation started in the US Justice Dept in Jan, no
indictments have been returned against Lay or Skilling. On Oct 2, 2002, prosecutors charged Fastow with fraud. |
Global
Crossing
Optical
fiber company filed the 4th largest bankruptcy under the
weight of $12 billion in debt.
The
company is chartered in Bermuda to avoid US corporate taxes, even
though it is headquartered and run out of the US, as well as enjoying
all the rights and access to government contracts that US corporations
enjoy |
Engaged
in capacity swaps with Qwest Communications (see below) to improperly
book revenue to inflate stock price. In one Congressional hearing,
Rep. Billy Tauzin (R., La.), said executives "pursued sham
transactions to put revenue on the books, to mislead investors, and to
prevent further drops in their stock prices." Many of these
transactions were done in the last few days, sometimes the last
minutes, of the financial quarter to help meet earnings expectations.
CEO
Casey may have misled Wall Street analysts when he denied on several
occasions Global Crossing used swaps.
Chairman
Winnick, who works out of a replica of the Oval Office inside a gated
plaza, sold more than $730 million in shares before the announcement
and devaluation of the stock. |
Global
Crossing and Winnick’s sale of shares are the subject of
investigations, but no indictments have been returned. Winnick is
still CEO and will remain at that post through the company’s
reorganization. Winnick has refused to cooperate with Congressional
investigations.
CEO
John Legere was forgiven a $10 million balance on an interest-free
loan, and given a $2.75 million severance payout, even though share
prices were down 90% and the bankruptcy stopped severance payments to
workers who had already been laid off.
No
action is planned on companies moving overseas to avoid taxes, but
retaining full rights and government contracts. |
Qwest
Communications
The
dominant local telephone company in 14 states improperly accounted for
about $1 billion and may have to restate another $500 million in
sales. Shares dropped to $1 each, down 89% from the start of the year
and a high of $66. |
Engaged
in hollow trades and capacity swaps with Global Crossing and other
telecoms to boost revenue and meet earnings expectations.
"Investors in Global Crossing and Qwest lost billions of dollars
when the truth came out about these companies' finances, while
insiders walked away with billions of dollars," according to Rep.
James Greenwood (R., Pa.), who chairs a Congressional committee
investigating the companies.
On
several occasions executives asked that the details of the swaps not
be put in writing to avoid scrutiny. An internal memo by the CFO
Szeglia indicated Qwest would penalize anyone who questioned the
company’s handling of swaps and followed through by blocking
business to Morgan Stanley, which publicly questioned Qwest’s
reliance on swaps. Qwest lays the blame with Arthur Andersen, which it
says approved the accounting related to the capacity swaps.
Qwest’s
founder and largest shareholder, Philip Anschutz, sold $213.5 million
in shares prior to the restated earnings report. |
Investigations
by the SEC and the Dept of Justice regarding the inflated revenue
reports started in March 2002, but no action has taken place.
Anschutz’s sale of stock is a subject of investigation, although it
is a small part of the $1.6 billion in Qwest stock he sold |
Tyco
This
large conglomerate is chartered in Bermuda to avoid US corporate
taxes, even though it is headquartered and run out of the US, as well
as enjoying all the rights and access to government contracts that US
corporations enjoy. |
Former
CEO Dennis Kozlowski and former Chief Financial Officer Mark Swartz
looted company and shareholders of $600 million that went to
themselves and others who helped them cover up improper secret loans
that were forgiven without proper authorization. Tyco also seems to
have taken losses on certain business transactions that it improperly
booked as profit, which then justified bonuses for executives.
The
two men used the money to buy houses, art and luxury items for
themselves, including a $1 million birthday party for Kozlowski’s
wife on the Italian island of Sardinia that included toga-clad waiters
and an ice sculpture of Michelangelo’s “David” with Vodka
pouring from his genitals.
Kozlowski
also improperly bought valuable paintings by Renoir and Monet worth
$13.2 million using funds borrowed from Tyco, only some of which has
been repaid, and he evaded $1.1 million in New York State sales tax by
falsifying documents related to the art purchases and sending empty
boxes to the company’s New Hampshire address. |
Criminal
indictments and SEC action have been announced against Kozlowski and
Swartz. Both men are currently free on bail even though the Manhattan
DA’s office argued that the $10 million Kozlowski’s wife put up
for bail and the $5 in Tyco stock used by Swartz was tainted money
they stole from Tyco.
Even
though a grand jury was investigating Swartz, he received a $45
million severance package from Tyco, which remains in effect even if
he is convicted of a felony. Kozlowski’s severance package is
potentially worth $100 million.
No
action is planned on companies moving overseas to avoid taxes, but
retaining full rights and government contracts. |
WorldCom
(now MCI)
Telecommunications
giant announced a series of restatements totaling about
$9 billion
so far, and it displaced Enron as the largest bankruptcy filing in US
history. The stock price fell from a high of $64 to $0.09, reducing
their total value from $120 billion to about 4400 million; 17,000
employees have been laid off.
NY
state pension plan lost $300 million because of WorldCom investments.
NEW: The Justice Department is investigating allegations that WorldCom Inc. improperly rerouted long-distance calls in the United States and Canada to evade paying hundreds of millions, if not billions, of dollars in access fees to other phone companies, sources said yesterday.
U.S. Probes WorldCom On Evading Access Fees
(Washington Post July 27, 2003; Page A01)
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Deputy
Attorney General Thompson said CFO Scott Sullivan and Controller David
Myers “systematically flouted rules of accounting and lied outright
to investors to perpetuate the false image that WorldCom was
succeeding.” In response to overbuilding and excess capacity in
telecommunications, business was deteriorating, and executives put
pressure on numerous others to, in Myer’s words, engage in
accounting adjustments for which “there was no justification or
documentation and were not in accordance with generally accepted
accounting principles." WorldCom executives pressured
whistleblowers to remain quiet and Myers warned employees who had
questions not to discuss their concerns with outside auditors.
Co-founder
and CEO Bernie Ebbers borrowed $400 million from the company just
before it crashed and has yet to repay the loan, which he used to
cover margin calls related to purchases of WorldCom stock. Ebbers was removed from his position when WorldCom declared
bankruptcy, but he negotiated a severance package worth $1.5 million a
year for life. |
Sullivan
faces up to 65 years if convicted on all counts of fraud, conspiracy
and false statements; he is free on $10 million bond.
Myers,
stating he was ordered by superiors, pleaded guilty to three counts of
wire fraud and related offenses, and faces a maximum of 20 years plus
fines, which will likely be reduced for his cooperation.
Accounting
Director Buford Yates pleaded guilty to “assisting in a massive
fraud”; he is free on $500,000 bail.
May 2003: SEC in 'largest fine
ever' fined Worldcom $500 million to settle all wrongdoing. See "Worldcom
Stockholders Owe SEC Thanks for Almost Nothing" Washington
Post 26 May 2003 E 01.
27 Aug 2003: Oklahoma Files Criminal Charges Against Ebbers, WorldCom.
Oklahoma Attorney General, noting the state lost $64 million in
Worldcom related investments, said: "We allege the company and these six employees executed a scheme to artificially inflate the value of WorldCom stock and bonds by intentionally falsifying information filed with the Securities and Exchange
Commission."
He added: "It is rare that we name a company in a criminal complaint, but in this case it is
justified. The decision to commit this fraud was a company decision. This is not some rogue employee trying to line his own pockets. This was a conscious decision made for the benefit of the company."
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Tough on
Corporate Crime Intro + Huff and Puff and.. Do Little [part
1]
Hot Deals,
Looting and Covering Up: Understanding the Frauds of 2002 and
Legislation in Response [part 2]
Sarbanes-Oxley
legislation & critique + Conclusion [part 3]
Wall Street Sees Chance To Put Off Reforms: Pitt's Departure, GOP Win Prompt Go-Slow Sentiment
(Washington Post 11/8/02)
*The
title comes from a phrase used by Simon Shama, in “The Dead and the Guilty,”
The Guardian (Sept 11, 2002), http://www.guardian.co.uk/september11/oneyearon/story/0,12361,789978,00.html.
In the article, he notes that “Enron Corporation['s] implosion began the
unraveling of scoundrel capitalism.” Other sources include: Devin Leonard,
“The Adelphia Story” Fortune, (August 12, 2002), http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=208825;
CNNMoney, “Rigas and Sons Arrested,” (July 25, 2002) http://money.cnn.com/2002/07/24/news/rigas/; George Mannes,
“Adelphia Charges Up the Ante,” “TheStreet.com,” (July 24, 2002), http://www.thestreet.com/_yahoo/tech/georgemannes/10033900.html;
Carrie Johnson and Christopher Stern,
“Adelphia Founder, Sons Charged,” Washington Post (July 25, 2002), p.
A1; “Swartz Got Rich Severance Deal,” Boston Globe, September
26, 2002, http://www.boston.com/dailyglobe2/269/business/Swartz_got_rich_severance_deal+.shtml;
Peter Behr and Dan Eggen, “Enron Is Target of Criminal Probe,” Washington
Post (January 10, 2002), p. A1; Peter Behr and April Witt, “Visionary's
Dream Led to Risky Business,” Washington Post (July 28, 2002), p A1;
Jonathan Krim, “Fast and Loose At WorldCom: Lack of Controls, Pressure to Grow
Set Stage for Financial Deceptions,” Washington Post (August 29, 2002),
p A1; Jonathan Krim, “WorldCom Staff Told Not to Talk to Auditor, E-Mails
Show,” Washington Post (August 27, 2002), p E3; David M. Ewalt and John
Kreiser, “Sidgmore Steps Down As WorldCom CEO; Ebbers May Lose Golden
Parachute,” InformationWeek.com (September 10, 2002), http://www.informationweek.com/story/IWK20020910S0007;
Motley Fool, “The Motley Fool Take on Wednesday, Feb. 27, 2002,” http://www.fool.com/news/take/2002/take020227.htm;
Motley Fool, “The Motley Fool Take on Wednesday, June 5, 2002,” http://www.fool.com/news/take/2002/take020605.htm;
Robert O’Harrow, “Tyco Executives Free on Bond of $15 Million,” Washington
Post (September 28, 2002), p E1; Carrie Johnson and Ben White, “WorldCom
Arrests Made,” Washington Post (August 2, 2002), p A1; Ben White,
“WorldCom Officer Pleads Guilty to Fraud,” Washington Post (October
8, 2002), p E1; Citizen Works, “Corporate Crookbook: Corporate Scandal
Sheet,” http://citizenworks.org/enron/corp-scandal.php. Gimein, “You
Bought. They Sold.”
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