Guide to Corporate Scandals: Who Did What

["Alex LoCascio" <alexlocascio@xxxxxxxx>]

Courtesy of The Economist magazine

http://www.economist.com/agenda/PrinterFriendly.cfm?Story_ID=1224700

A guide to corporate scandals

Jul 11th 2002 
>From The Economist Global Agenda


Corporate scandals have plagued America, sent shudders through stockmarkets and 
given the mighty dollar a knock. Even President George Bush has been forced to 
defend himself over his own links to big business and allegations of improper 
dealings. But not every ?scandal? is the same, and not every businessman a crook
 
AMERICANS are perplexed. They were convinced that they had the best economy in 
the world, where the most productive workers produced the most innovative 
companies, which shored up the strongest currency that flowed through the 
cleanest and most liquid capital markets. If any other country wanted to do 
half so well, they would have to emulate American-style capitalism. Not for 
America the ?crony capitalism? of Asia or the egalitarianism of Europe. America 
rewarded hard work and smart people. But now Americans are asking just how much 
of the great boom the country has gone through was real, or the result of 
corrupt executives enriching themselves at shareholders' expense with the help 
of complicit accountants and greedy bankers. 

But just as George Bush told Wall Street on July 9th when he outlined a package 
of proposals to clean up corporate America, not all businesses are bad. Even 
amongst those that have been fingered for various accounting irregularities, 
there is a vast difference between those who merely made optimistic assumptions 
and those who lied.

Enron tops the list of America?s biggest corporate collapses. The giant energy 
group filed for bankruptcy protection last December after admitting that its 
profits over the previous few years had been nearly $600m lower than what had 
been claimed. Enron?s standing was battered when it was revealed that it had 
used ?special purpose vehicles?, or off-balance sheet entities, to enhance its 
earnings and reduce its debt. Even worse, it emerged that Andrew Fastow had a 
role in running one of the off-balance sheet partnerships in an apparent 
conflict with his role as Enron?s chief financial officer. He made $30m from 
that partnership. Both Mr Fastow and Kenneth Lay, Enron?s chief executive, 
pleaded the Fifth Amendment to avoid self-incrimination when asked to testify 
in front of a Senate committee. The board has also been criticised in a report 
issued by a Senate committee in July that found that directors had missed 
several warning signs that something was wrong with the accounts. 


Andersen were Enron?s auditors. They were destroyed as a firm, even before 
being found guilty of obstruction of justice in June. Andersen?s chief 
executive, Joe Berardino, initially admitted only to a few misjudgments, but 
the firm toppled when it admitted that an ?expedited? shredding of 
Enron-related documents had taken place in its Houston office after the 
Securities and Exchange Commission (SEC) had launched an investigation into 
Enron?s accounting. The partner who led the Enron account, David Duncan, has 
admitted that he is guilty of obstruction of justice, but he is expected to be 
treated leniently after agreeing to turn state?s evidence. 

Tyco then found itself at the centre of rumours. The firm, a 
healthcare-to-telecoms conglomerate built up from a small New England 
electronics maker by Dennis Kozlowski, was being pressured by shareholders to 
break up the group, but that plan was abandoned in April. Mr Kozlowski then 
said he would only float CIT, Tyco?s finance division. He upset shareholders 
with poor earnings and a big writedown of telecom assets, but said all the bad 
news was on the table. It wasn?t. In June, Mr Kozlowski was indicted on charges 
that he had evaded $1m of New York sales tax on art purchases. Without waiting 
for a verdict, his board kicked him out. However, Tyco still has an 
investment-grade credit rating and should survive.

Global Crossing was one of the hottest telecoms companies, and only five years 
old. But in January it filed for bankruptcy after being brought down by a 
massive strategic gamble that went wrong. The company thought that it could 
make a fortune by borrowing billions of dollars to lay fibre-optic cable and 
selling its signal-carrying capacity to corporations. Unfortunately, it was not 
the only company with such a vision. There was a glut of fibre-optic cable and 
prices tumbled. However, the SEC is investigating whether the company also 
engaged in swapping capacity with other operators in an attempt to boost 
revenues.

Qwest Communications, another telco, was known to be an aggressive user of such 
so-called ?hollow-swaps?. These practices are being looked at by the SEC, which 
launched an investigation in March. In June, Qwest's chief executive, Joe 
Nacchio, was forced out by the board. Mr Nacchio sold more than $300m of stock 
during his tenure. In July, Qwest announced that it was facing a criminal 
investigation. The company is desperately trying to sell assets before the 
year-end to avoid defaulting on repayments of its $26.6 billion of debt. 

WorldCom is another big telecoms group, but its problems dwarfed those at 
Global Crossing. WorldCom, which owns the American long-distance MCI network, 
admitted in June that it had mistakenly booked $3.8 billion of costs as capital 
expenditure, and that the profits it recorded over five quarters from the 
beginning of 2001 should have been losses. The company, whose accounts had also 
been audited by Andersen, sacked its chief financial officer, Scott Sullivan. 
WorldCom?s flamboyant chief executive and founder, Bernie Ebbers, had been 
forced out in April. But even the confession of wrongdoing was not enough to 
satisfy the SEC, which is investigating the company?s accounts. Harvey Pitt, 
the SEC chairman, has described the company?s statement as ?wholly inadequate 
and incomplete?. Both Mr Ebbers and Mr Sullivan pleaded the Fifth Amendment 
when called to testify in front of a congressional committee on July 8th. The 
company is now in default on large chunks of its debt because its accounts do 
not comply with American accounting standards. It has to renegotiate its debts 
and may have to sell itself to survive. But with telecoms in a slump, there may 
not be many buyers.

Xerox restated its accounts in June because the office-equipment company said 
that a so-called ?misapplication of GAAP? (generally accepted accounting 
standards) overstated its profits by $1.4 billion over five years. Xerox had 
already settled SEC charges by paying a $10m fine, and has seen several senior 
executives quit. It has new loan agreements with its banks and has struck a 
deal with GE Capital to take an equipment-financing business off its balance 
sheet. However, investors are still nervous and its shares languish.

Vivendi, a sewage-to-films conglomerate finally got rid of Jean-Marie Messier, 
its egocentric chief executive, in July, after its two main banks refused to 
extend it any more money. The French company is laden with around euro33 
billion of debt thanks to an expensive spending spree that included buying 
Universal Music, Universal Studios and American cable television networks. It 
has denied allegations that it tried to flatter its accounts. The company has 
not been helped by a decision by Moody?s, a credit-rating agency, to downgrade 
its debt to non-investment grade, or ?junk? status. Under a new chief 
executive, Jean-René Fourtou, it will have to dispose of some of its assets to 
raise cash to pay its debts. Whether it emerges as a French utility or as an 
American entertainment group will depend at least in part on French political 
pressure. Mr Fourtou has begun to assign clear responsibilities to the board: 
Mr Messier was criticised for keeping the board in the dark about key decisions.


Merck, a giant pharmaceutical company, also got tarred with the ?dodgy 
accounting? brush. It admitted in early July that it had overstated its 
revenues?and its costs?by some $14 billion over three years. But this is not 
another Enron?Merck?s profits were not overstated and there is certainly no 
question of fraud. However, it looked odd for Merck to include as revenues 
money that was paid to retail pharmacies and that it never touched. It sat 
badly with investors and, combined with volatile stock market conditions, was 
enough to prompt Merck to pull the proposed flotation of its Medco benefits 
subsidiary. 

Bristol-Myers Squibb, another huge and respectable drug company, disclosed in 
July that the SEC was making informal inquiries into its wholesaler sales. At 
issue is whether Bristol-Myers gave inappropriate incentives to wholesalers to 
take stock in order to enable it to meet its 2001 sales targets.

Elan, another pharmaceutical company, is now also facing irate investors and 
with more justification. Although Irish, Elan is exposed to American investors 
through its Nasdaq listing. Its share price came under pressure in January 
after newspaper speculation about its accounting policies. This prompted Elan 
to admit to using off-balance sheet vehicles, and the SEC began an 
investigation. Then the company suffered a setback on a drug it was developing 
to treat Alzheimer?s disease. In June, Tom Lynch, its chief financial officer, 
was demoted to deputy chairman and in July he and the chairman, Donal Geaney, 
left the company. They were, though, retained as consultants.

Halliburton is an oil company that used to be chaired by Dick Cheney, Mr Bush?s 
vice-president. The SEC is looking into how this company handled cost overruns 
on construction jobs. Judicial Watch, a conservative group, is suing both 
Halliburton and Mr Cheney for allegedly deceiving investors.

Harken Energy is a company in which Mr Bush was a director. In 1990 he sold 
shares in the Texan firm just eight days before it unveiled sharply-increased 
losses. As an insider, he ought to have told the SEC immediately, but notice of 
his sales was not filed for nine months. Mr Bush has blamed this on a ?mix-up? 
by his lawyers. The SEC investigated at the time, but never took any action. 

 
Copyright © 2002 The Economist Newspaper and The Economist Group. All rights 
reserved.
 
 
 


-- 
__________________________________________________________
Sign-up for your own FREE Personalized E-mail at Mail.com
http://www.mail.com/?sr=signup

Save up to $160 by signing up for NetZero Platinum Internet service.
http://www.netzero.net/?refcd=N2P0602NEP8


~~~~~~~
PLEASE clip all extraneous text before replying to a message.