[ corporations-suck.com ] reports : Malfeasance

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You get 4 years if your Michael Milken but 10 to 15 if you rob the milkman. - Michael Franti

Corporations Suck Report: Malfeasance
by Green Earth Al

CS Disclaimer: This article is a mixture of facts and opinions. Anything that is represented as a fact is a fact to the best of my knowledge. Anything that is represented as opinion is my opinion (which I am entitled to). I assert that nothing in this article has been fabricated by me, I have no investments, long or short, in these companies and no motivation for writing this article other than wanting to see corporations begin to put the best interests of people before profits.

Malfeasance - n. misconduct or wrongdoing committed esp. by a public official

"What just happened?" That's the collective agonized query of millions of investors, pensioners and retirement account holders. Even people who had the utmost faith in corporations and assured us all that corporations could be trusted completely are going back and wagging the finger of shame at those they used to champion. They used to brag daily on the financial channels about how the American corporation was the most stable and worthwhile investment in the world and then they used the word "transparent" a lot.

Well, it looks like the quarterly reports and the 10Qs and all that stuff that they told us would be impossible to falsify were a little more opaque and a little less transparent than they thought. Let's take a trip down recent memory lane shall we:

Tyco

Ah Tyco. Less of a corporation and more of a personal piggy bank for Dennis Kozlowski. When Dennis wanted to buy a huge mansion in Florida he didn't use his enormous CEO salary no buy it. No. Why would he? He can just use Tyco to write him a 20 million dollar loan. And then when he doesn't feel like paying the loan, he doesn't have to, he can just have Tyco wave the loan away with their magic wand. But why stop there. Obviously Tyco also wanted to buy him extravagant works of art and a Yacht, I mean come on, what good is a mansion if you don't have a yacht? And none of that needed to be reported to the shareholders of Tyco, why would they need to know that? He was only bilking the corporation out of a hundred million dollars or so when you add up his improperly issued loans and bonuses and the like. No big deal right? The board of directors who were supposed to be watching him obviously didn't think it was a very big deal. But that's just the tip of the iceberg. The real money was made when Koslowski and Chief Financial Officer Mark Swartz drove the stock price way up with misleading performance reports and then cashed out on 400 million in Tyco stock. Oddly enough, Kozlowski is small time compared to his corporate criminal peers.

Adelphia

Good ol Adelphia. Run by the Regis family and operating in my hometown of Buffalo these folks were so blatantly obvious about their malfeasance that they could actually be arrested right away. Y'see most CEOs and CFOs and C-whatever else-Os are good enough at hiding their crimes that it may take years to prosecute them. You'll notice that Ken Lay of Enron fame is still walking around free to this day. But I guess the Regis family wasn't paying attention on the day they were teaching subtlety in corporate crime school. For whatever reason Regis & sons thought they could just brazenly take more than a billion dollars out of their corporation, I guess because they just felt like it. A billion with a b sounds like a lot of money huh? Just wait.

Worldcom

WORLDCOM. The Grand daddy of corporate fraud. They commit more fraud before 9am than most corporations commit all year. Remember when the stock market was soaring and everything related to technology just went up and up and up? Well a little telecom company that could hired a man named Bernie Ebbers to skyrocket them to the top during the roaring 90s. His, so called, competition, corporations like AT&T and Sprint couldn't figure out how Worldcom was coming up with such huge revenues. I mean, weren't they all telecom companies? What did Worldcom have that they didn't have? Well, what those other corporations didn't realize that they were being slowed down by actually reporting their expenses. Reporting expenses is so totally yesterday. Bernie just realized that if you hid your expenses down a convoluted meandering hole, nobody would know or care. You did a big enough whole, you can hide a LOT of expenses. After Bernie was long gone from Worldcom the company's new management began going through the books and SHOCKED THE WORLD when they found out that Worldcom had misrepresented 4 billion dollars in expenses. That's right folks, we didn't make a billion dollars we actually lost 3 billion dollars. But it didn't stop there. They had to come back several months later and confess that going back a little further they hadn't misrepresented for 4 billion dollars it was more like 7 BILLION! And then they went back a little further and it became 9 BILLION!

The best part is that we have no idea whether Bernie Ebbers will go to jail or not because, get this, he claims he didn't know about it. He was only the CEO of the company after all. Isn't it too much to ask that he has to watch over Worldcom's finances so closely that he would actually notice a missing 9 billion dollars? I mean come on, he's only human.

Sunbeam

Where have all the Sunbeam vans gone? In business there are always some companies that are out ahead of the curve. Rather than waiting, Sunbeam jumped way out ahead of the pack and started scamming their investors back in the mid 90s. It's not like they invented corporate crime, but they were certainly out in the forefront riding the crest of this new wave of corporate malfeasance.

Sunbeam CEO Al Dunlap and CFO Russell Kersh inflated Sunbeam's earnings by securing long term contracts and reporting the whole contract as earnings whether they had been paid up front or not. This was going to have the effect of making things look really good at the moment and then look really bad later on when revenue would come in and they wouldn't be able to report it because it had already been recorded. But that was okay with them since they weren't planning on sticking around until things got bad, they just wanted to pack in some huge earnings numbers and get the stock buying public to think they were the new "hot", "growth" story in the market. They did that and they made big money on stock sales while it was a high flying wall street darling.

Maybe this was like the test case for crooked accounting firm Arthur Anderson. Tough to speculate on who was teaching who but Arthur Anderson sure did perfect these tricks later and export them to other clients that they did auditing for.

The notable thing about this case is that the fraud happened long enough ago that we can get some kind of picture of what the penalties are for all of this. All of these other examples happened recently enough that it's hard to tell if any evidence will be found and whether anyone will ever have to pay anyone back the money they swindled or be convicted of a crime. But these guys were found out long ago and have been through court and when all was said and done the pair had to pay back $700,000 and are prohibited from holding top positions for corporations in the future. Hmmmmm... I wonder if I could rob a bank for $700,000 and then if I get caught they will just allow me to pay it back as long as I promise not to do it again.

Martha Stewart, Omnimedia & ImClone

And now ladies and gentlemen, the glamour case of corporate corruption. What strikes me most about this case is the media's uncanny ability to completely miss the point here. What it basically boils down to is that the ImClone corporation was developing a drug called Erbitux which showed some promise in fighting certain types of cancer. Maybe "developing" is the wrong word. More accurately, they were given the drug Erbitux and all they had to do was conduct the research on it and make sure it worked and then make billions and billions of dollars off of it by selling it (for far, far more than it cost to develop and produce) to hapless cancer patients who would have no choice but to pay. BUT ImClone didn't really feel that they wanted to do real research on the drug because the drug might not actually work, and if it didn't work their profits go up in smoke. So rather than doing the research in earnest they just handed in any old crap to the FDA (Food & Drug Administration) and expected the FDA to approve the research without really looking at it.

Well, the FDA did look at it and ImClone found out that their research was about to be rejected and their roll out of the drug would be delayed and that was surely going to send the price of ImClone stock tumbling. So, the CEO of ImClone whispered in the ears of his friends and family that this was about to happen and there was a nice, large, orderly exit from the stock by some of Sam Waksal's inner circle while every day investors sat around blissfully unaware that the sky was about to fall. Now I have no doubt that after this all came to light Martha Stewart regrets the day she ever met Sam Waksal because the whole scandal has dragged the stock price of her own company down with it. The losses she avoided by selling ImClone in the nick of time were pocket change compared to how much money she used to have in her own stock before it went tumbling.

The thing of it is, all we ever see on the news about this is that a famous person, Martha Stewart, got caught doing something naughty. Nothing is ever mentioned about the fact that a drug almost got released to the American public but didn't, and if this drug does work, millions of cancer patients who could have been helped by it may have died during this delay because ImClone didn't want to do their homework for real. And on the other hand if the drug does not work there is another missed story in the fact that ImClone tried to push it on the American public anyway and would have made a fortune selling false hope to desperate people.

Enron

Another company with another CEO who claims they had no idea what was going on. Only it's a little more plausible in this case since you could look at Enron's books for years and not have the first foggiest notion as to what is going on. Congratulations to Enron's Chief Financial Officer Andy Fastow for presiding over the most complex and convoluted shell game in corporate history. In it's heyday Enron was merging and acquiring so fast it made investors' heads spin. It seems they liked hiding losses in well hidden international off balance sheet hidey holes and piling the paperwork on top of them. They were growing at a phenomenal pace and passing themselves off as a sturdy blue chip entity with unlimited potential. Sure there were lots of analysts that couldn't figure out how they made money no matter how closely they looked, but Enron assured everyone that the money was just pouring in.

Meanwhile, Enron liked to buy the Democrats and Republicans (Republicans especially) in order to legislate themselves some more money. Many people believe that it was their deregulation legislation that passed congress and allowed them to monkey with the energy prices in California. Anyone remember rolling blackouts? It looks as though Enron's fingerprints are on that one.

Enron is also the company that practically authored Vice-President Cheney's energy plan. I know it's tough to remember anything that happened before September 11, 2001, but try to remember back to that glorious proposal that would have had us building 1,300 new nuclear power plants and investing major sums of money into coal and gas based energy all but eliminating any hope of any real R&D dollars going to renewable sources of energy.

But perhaps best of all of Enron's deft business skills is the ability of it's officers to jump ship while their employees are stuck with worthless paper. Enron executives threw a little going away party where they wrote themselves enormous bonus checks (I guess they figured they deserved great big bonuses for driving the stock price from over $80 to under $1.00), and all the while they had their wall street analyst buddies insisting that the stock was going to rebound at any time. While trusting investors stuck out their hands for the falling dagger, Enron execs were cashing out and living high on the hog.

Global Crossing

Wanna learn a neat trick? Okay, let's say you own a $50,000 house. Now, let's say you sell your house to your next door neighbor for $50,000 and he sells it back to you for $50,000 and you sell it back to him for $50,000 and he sells it back to you for $50,000. You and your neighbor keep selling your house back and forth to each other all day long. Now, at the end of the day you go down to the bank and you tell the bank that you are in real estate sales and that you generated $1,000,000 in sales today alone (because you sold your own house 20 times which did add up to a million). The bank would be pretty impressed. I'm sure they'd be willing to write you out some big loans based on your flourishing business and you could buy yourself a shiny new car. The only problem is that you would then go to jail for fraud because you aren't allowed to do that unless you are a corporation.

If you are a corporation like Global Crossing however, you can sell things that aren't even as tangible as a house (like, oh, let's say internet bandwidth) and you can sell it back and forth and report it as revenue. When wall street finds out how much "revenue" you have they will buy and buy your stock and send the value through the roof. Then you can cash out on a chunk of your shares and spend the rest of your life on easy street. And you can make a lot of money for your friends like Democratic National Committee chairman Terry McAullif who can get his democratic friends on the hill to try to keep the heat off you.

Global Crossing chairman Gary Winnick, a student and friend of famous liar, cheat and swindler of the 1980s, one Michael Milken, was able to cash out more than $700,000,000 in Global Crossing shares. And while I feel obligated to give him a little credit for the fact that he at least testified before congress rather than pleading the 5th like the rest of his corporate criminal compatriots, I have to say I was just amazed and astounded at how he sat before congress and tried to make himself out to be a victim and the hero of the day. Apparently he was a victim because he did not cash out of all of his shares so he lost a lot of paper value that he used to have and he was only able to come away with 700mil, and a "hero" because he felt so bad for all of the poor Global Crossing employees and shareholders that he was going to refund a portion of the losses out of his own pocket. While the congressmen of the House Energy and Commerce subcommittee ooed and ahed at this man's unbeleivable generosity I tried to moderate my blood pressure. Are you kidding me? After swindling the people for hundreds of millions he is willing to give $25 million back? CALL THE POPE, THIS MAN IS A SAINT!!!

Arthur Anderson

And finally we come to Arthur Anderson. In this huge cheating on your homework ring we have here the people who taught everyone how to cheat. Arthur Anderson, a respected and trustworthy accounting firm for as long as anyone could remember became the go to firm under CEO Joseph Berardino for anyone who needed a good set of phony numbers for their financial reports. Arthur Anderson was the accounting firm for Enron, Worldcom, Sunbeam, Global Crossing, Quest and many others. They were good freinds with vice president Dick Cheney while they were his accounting firm when he was the CEO of Halliburton, and they were also good friends with George W. Bush when he was with Harkin Energy. I guess it helps to have connections. They've got lots and lots of friends all over congress. Why, when they were concerned that the Securities and Exchange Commission under the direction of Arthur Levitt might make it too difficult to cheat they got their democratic henchmen in the senate, Connecticut senators Joe Lieberman-D and Chris Dodd-D, to make sure that the accounting rules remained loosey goosey. In fact the corporate constituency of Arthur Anderson was so thrilled with the job that Harvey Pit did in representing Arthur Anderson as its lawyer, that when they finally had the corporate super-friends of Bush and Cheney in the white house they took the first available opportunity to replace Arthur Levitt --you know, for suggesting something so heinous as actually having accounting agencies follow pesky things like rules-- and they replaced him with Harvey Pitt (a guy who knows that we don't need no stinkin' rules).

Arthur Anderson was an corporate innovator. They took all of the petty corporate crimes and elevated them all to art forms. Who had ever seen destruction of documents on such a mass scale before we had Arthur Anderson shredding all the evidence for their Enron buddies? And who had even heard of things like off-balance sheet partnerships and other great avenues for hiding any and all losses that would just ugly up your quarterly reports? They really knew how to get those stock prices rising so that you could cash out of a large number of shares and then sneak away in the night. Then if you get caught you can always say "Hey, I only cashed out a portion of my shares, I still held on to 70% of my stock" or whatever. I guess it helps if you have a little tear in your eye when you talk about how much imaginary money you lost while real people out there lost real money and didn't get the memo that it was time to cash out because all your fraud was about to come to light.

How are we supposed to teach our children about honesty and respectability in a world where big business and government get ahead on a daily basis with their cheating and apathy for their fellow man? Teachers, parents and adults trying to tell kids to do the right thing have it that much harder because the kids can turn around and say "That's not how the world works," and they will be able to point to concrete examples of where cheaters DO win and the truth doesn't set you free but lying sets you up for life. And they will be right! If we continue along this path and just ignore it all or assume we are powerless to change it then by the time our children are the leaders and we depend on them for assistance we will get the same garbage back out of them that we put in and we will have deserved it.

Reference List & Further Reading:

http://www.washingtonpost.com/ac2/wp-dyn/A1182-2002Aug9?language=printer
http://www.townhall.com/columnists/larrykudlow/lk20021003.shtml
http://www.forbes.com/2002/04/30/0430wcom.html
http://www.coastalpost.com/02/07/04.htm
http://www.austinreview.com/articles/2002_10/global.htm
http://www.pbs.org/newshour/bb/business/enron/player1.html
http://www.pbs.org/newshour/bb/business/enron/player6.html
http://www.commondreams.org/views02/0712-02.htm
http://www.infoworld.com/articles/hn/xml/02/02/08/020208hncrossing.xml
http://www.knoxnews.com/kns/business/article/0,1406,KNS_376_1511150,00.html
http://www.cfo.com/article/1,5309,7660%7C22%7C%7C%7C,00.html

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Sep.5.2008

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