Labels: Enron, Kenneth Rice, Kevin Howard

Labels: Enron

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Labels: Bill Lerach, Coughlin Stoia, Enron, settlement

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Labels: Enron, NatWest Three, sentencing

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Labels: Bill Lerach, Enron, scheme liability, Stoneridge

Labels: accounting fraud, Enron, KPMG, tax shelters

Labels: accounting fraud, Enron, insider trading, Kenneth Rice, securities

Labels: accounting fraud, Bush administration, class action, Enron, investment banks, Paul Clement, Stoneridge

Labels: accounting fraud, Enron, Jeff Skilling, Kevin Hannon

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Labels: Centaurus Energy, energy trading, Enron, hedge fund, John Arnold

“At the level of an Enron or a WorldCom, I am pretty confident that the auditors would stumble across it in two or three years, but one would have no real confidence that they would come across it in year one unless they were incredibly lucky or the management made a mistake. The audit is simply not designed to deal with that.”

Labels: accounting fraud, Enron, PWC, regulation

Labels: Andy Fastow, Enron, Louisiana, Michael Kopper

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Labels: Enron, Malcolm Gladwell, The New Yorker

Rent-Way’s board made a decision within days of detecting the fraud — Mr. Morgenstern called the Securities and Exchange Commission and revealed everything. The company would turn over documents typically protected by attorney-client privilege, he said. He then invited the S.E.C. to set up an office at Rent-Way’s headquarters to conduct an on-site investigation.

Labels: Enron, Fraud, pre-trial agreements, Rentway, SEC, Worldcom

Labels: appeal, Conviction, Enron, Fraud, jail, Jeff Skilling

Labels: appeal, bail, corruption, Enron, Houston's Clear Thinkers, Jeff Skilling, prosecution, white collar crime

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Labels: Enron

..."good business dictates good compliance. Even the hint of scandal can send the price of a company's stock plummeting. Academic reports are showing a correlation between compliance and stock price: Corporations that perform effective checks on their internal controls actually outperform those with weak internal systems. Moreover, an effective ethics and compliance system is the best means to prevent a scandal from occurring in the first place. As a board member observed at a recent ethics and governance training session I conducted, the lesson he learned was that "managing" a major corporate scandal is an oxymoron, and consequently the best solution is preventing it from ever happening."

Labels: Andrew Weissmann, Enron

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Labels: Enron, NatWest Three

Prime Minister Tony Blair is under pressure from political parties, human rights groups and the business community to halt the extradition of the three men — David Bermingham, Gary Mulgrew and Giles Darby — on grounds that the extradition arrangements are unfairly weighted in favour of America.

Under the provisions, America is not required to make a prima facie case when it wants someone extradited from Britain. But Britain has to convince American courts that a prima facie legal case exists against a person for extradition.

This is because the 2003 extradition treaty, pushed through British Parliament in the wake of 9/11 attacks to facilitate extradition of terrorists, has still not been ratified by the U.S. Senate.

Labels: Enron, NatWest Three

Labels: Department of Justice, Enron

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Labels: Enron, money laundering

Another act in Enron show - Filing in massive shareholder suit to take aim at Vinson & Elkins

By TOM FOWLER
June 13, 2006
Houston Chronicle

Just in time for the intermission between last month's convictions and next September's sentencing in the main Enron criminal trial, plaintiffs' attorneys in a massive shareholder lawsuit are preparing a big show of their own. The likely star? Vinson & Elkins, the Houston law firm that was Enron's main outside counsel in the company's final days.

A filing expected in federal court as early as today will contain numerous documents aimed at supporting claims that V&E knew much more about troubles at the company than it has let on and should be liable for some of the billions of dollars in shareholder losses...

...Among the papers are voice mail message transcripts showing that as early as 1999, V&E attorneys questioned the propriety of Enron's former chief financial officer doing business with the company through a side partnership. Also included are notes made by the current head of the firm expressing concerns that legal opinions the firm provided didn't really satisfy accounting rules for millions of dollars in deals...

Labels: Enron, Houston's Clear Thinkers

Labels: Enron

'Enron of Spain' Fallout Ripples Into U.S. Markets

June 07, 2006
By Richard Behar

Some experts are calling it the "Enron of Spain," the biggest financial scam that country has ever known. A Spanish prosecutor has warned it might have “grave repercussions for the Spanish economy.” And now, the shock waves are rippling into U.S. markets, where the full effects are still unknown.

Earlier this week, the U.S. Securities and Exchange Commission launched an investigation of a relatively obscure New York stamp and coin trading firm called the Escala Group, a company that has morphed in just three years into the third-largest conglomerate in the collectibles industry, after Christie’s and Sotheby’s.

Trading in the stock of Escala — which has estimated annual revenues of $3 billion — reached a high of $35 in February on the NASDAQ stock exchange, but has slid over the past two weeks to around $7.50 – as the company has been battered by a dozen class-action lawsuits filed in the U.S., alleging fraud.

Escala insists it is innocent of wrongdoing, and notes that no authority has stated otherwise.

The SEC did not reveal the reasons for its probe, but it undoubtedly has much to do with the Spanish scandal, where some 350,000 working and middle-class investors in collectible stamps in Spain and Portugal may have lost billions of dollars in savings...

Labels: Enron

Labels: Enron

Judge Approves $6.6B In Enron Settlements

May 24, 2006
By Alistair Barr

A federal judge has given final approval for three banks to pay $6.6 billion to settle civil claims that they helped Enron Corp. manipulate earnings, according to published reports Wednesday. U.S. District Judge Melinda Harmon approved the deals with the Canadian Imperial Bank of Commerce (BCM) , J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C) , William Lerach, attorney for the plaintiff in the cases said in an interview.

The court order brings total settlements from this Enron litigation to roughly $7.3 billion so far, Lerach added. The class-action suit covers about 50,000 investors who owned Enron securities between September 1997 and December 2001. In total, the amount of money available to Enron investors exceeds the $6.1 billion that Wall Street forked over to WorldCom investors in similar litigation.

The attorney also said he's preparing new civil lawsuits against Enron insiders, auditor Arthur Andersen and seven other large banks including Merrill Lynch (MER) , Barclays Plc, Credit Suisse (CSR) and Royal Bank of Canada (RY)...

Labels: Enron

Labels: Enron

Labels: Enron

Labels: Andy Fastow, Enron

Kenneth Lay knew of Enron's troubles, Fastow says

By Alexei Barrionuevo and
Vikas Bajaj The New York Times
Via The International Herald Tribune
THURSDAY, MARCH 9, 2006

...Enron filed for bankruptcy in late 2001, setting off numerous investigations, including the four-year federal investigation that culminated in the trial of Lay and Jeffrey Skilling, Enron's former chief executive, now in its sixth week. The men are accused of fraud and conspiracy...

..Andrew Fastow [Enron's] finance executive, said he briefed Lay, who was then chairman, about the "serious problems" at the company in the summer and autumn of 2001, and the two jointly met with investment bankers to explore a restructuring, sale or merger of Enron...Fastow, who created the numerous off-balance-sheet partnerships designed to hide Enron's liabilities and bolster its reported earnings, is one of the government's star witnesses in the trial. On Tuesday, he strongly pointed the finger at Skilling, saying that he had approved of and directed Fastow's use of the partnerships to hide troubled projects and investments from investors.

Questioned for a second day by the prosecutor, John Hueston, Fastow detailed on Wednesday a series of meetings between himself, Lay and other executives in the late summer and autumn of 2001 after Skilling had left the company citing personal reasons. "I told Mr. Lay we had $5-to-$7 billion of embedded problems," Fastow said about a meeting a few days after Skilling left in August 2001. "Even if we are smart enough and don't make a mistake for five years, it would take us that long to work ourselves out of our problems."

Fastow said that he recommended hiring Goldman Sachs to help Enron pursue a restructuring, and that he and Lay met with bankers from the New York- based investment firm a few weeks later. Fastow said he recommended Goldman because the firm was not lending Enron money at the time, unlike many other Wall Street firms, which might have cut off their loans to Enron if they realized how severe its problems were.

Prosecutors displayed notes that Fastow made at the time listing the growing financial problems at the company's energy trading, broadband and international divisions. Fastow has pleaded guilty to fraud charges and agreed to a 10-year sentence in a plea deal with the government. By late 2001, reporters and Wall Street analysts had started raising pointed questions about the numerous partnerships that Fastow had created and profited personally from.

But in interviews, meetings with analysts and messages to employees, Lay deflected such questions and said the company was in fine health. "The company is fundamentally sound," Lay told employees in September 2001. "The balance sheet is strong." Fastow, however, testified that the company was scrambling to meet its earnings projections for the third quarter and had a shortfall of $826 million. The company covered a part of that gap by using accounting reserves, Fastow said...

Labels: Andy Fastow, Enron

...Wesley H. Colwell kicked off the fifth week of the fraud and conspiracy trial of Skilling and Enron founder Kenneth Lay, telling jurors he helped the company fraudulently manipulate earnings to meet or beat analysts' expectations by dipping into reserves when Enron needed an income boost that business operations didn't provide.

Colwell didn't say Skilling ordered him to plunder reserves to boost earnings. He said, however, that he e-mailed his boss then-Enron North America chief executive David Delainey days before Enron released second-quarter 2000 earnings to say he understood that it was Skilling's "preference" to surpass expectations.

Colwell explained later he had found out about Skilling's preference third-hand from accounting executive Mark Lindsey, who told Colwell that then-Enron Chief Accounting Officer Richard Causey had discussed it with Skilling. "I didn't talk to Skilling," Colwell said...

Labels: Enron

Labels: Enron

Conditions still ripe for ... another Enron?

By Carrie Johnson and Ben White
The Washington Post
February 12, 2006

Four years after the collapse of Enron spurred the most sweeping revisions in business regulation since the Great Depression, experts warn that the ingredients for a similar financial disaster remain. Despite new laws and regulations, companies still face enormous pressure to meet short-term financial goals, creating a powerful motive for accounting fraud. Outsized executive compensation grows by the year, offering another rich incentive to cook the books. And there is no certainty that Congress will continue to fund regulatory budgets at current levels.

But some things have changed since December 2001, when Enron's sudden descent into bankruptcy protection rocked investor confidence and left the markets reeling. Accountants face independent oversight for the first time in 70 years. Most corporate board members take their jobs far more seriously. Wall Street is somewhat less willing to accommodate clients' interests.

Nearly a dozen experts contacted by The Washington Post, including regulators, accountants, chief executives and board members, agreed to fill out a corporate governance report card on the eve of the Enron trial. The Houston energy trader's implosion exposed wide gaps in the safety net designed to protect shareholders. Former executives Kenneth Lay and Jeffrey Skilling are standing trial in Houston on fraud and conspiracy charges.

Accountants exploited loopholes to curry favor with companies that paid their fees. Executives collected more than $400 million in salary and bonuses but denied knowing about fraud on their watch. Investment bankers engaged in sham deals to help clients meet quarterly profit targets. Boards of directors waived conflicts-of-interest policies and turned a blind eye to overly aggressive business practices. And overwhelmed regulators failed to devote enough resources to combat fraud.

Congress passed the Sarbanes-Oxley Act in July 2002, imposing new duties on corporate executives, auditors and directors. The Securities and Exchange Commission (SEC) and the Justice Department spent tens of millions of dollars to root out malfeasance. Along the way, prosecutors won criminal convictions and decades-long prison terms for former leaders of Adelphia, Tyco and WorldCom.

But the government efforts may have backfired, inspiring a dangerous overconfidence among investors.

"I just don't think we are as far along as we need to be," said former SEC Chairman Harvey Pitt, who led the agency when it brought the biggest-ever fraud case against telecommunications company WorldCom in 2002. "Many shareholders may have been led to believe that [reforms] have cured all the problems and we're home free. Unfortunately, that's a prescription for disaster"...

Labels: Department of Justice, Enron, Tyco

Class Actions: Going Out of Style With a Bang?

Posted by Peter Lattman
February 7, 2006, 8:49 am
WSJ Law Blog

Last week in a post titled “Underlawyered.com,” we wrote about a study by Stanford law professor Joseph Grundfest, which found a steep drop in the overall number of securities fraud class actions filed.

Today, The Wall Street Journal’s Paul Davies has a story entitled “Class-Action Pay Settlements Soar.” Davies cites a study by Cornerstone Research finding that corporations paid a record $9.6 billion to shareholders to settle securities class action lawsuits last year, compared with $2.9 billion in 2004.

How to reconcile the two studies? The majority of last year’s payouts came from the $6.1 billion paid out by WorldCom and related parties. The number would’ve been even higher had it included the $7.1 billion settlement involving Enron, which was announced last year but hasn’t been finalized.

Labels: Enron, Standford Securities Class Action Clearing House

Opportunity for Corporate Fraud Has Shrunk -- but It's Still There

By Carrie Johnson and Ben White
Washington Post Staff Writers
Thursday, January 26, 2006; D01

Four years after the collapse of Enron Corp. spurred the most sweeping revisions in business regulation since the Great Depression, experts warn that the ingredients for a similar financial disaster remain.

Despite new laws and regulations, companies still face enormous pressure to meet short-term financial goals, creating a powerful motive for accounting fraud. Outsized executive compensation grows by the year, offering another rich incentive to cook the books. And there is no certainty that Congress will continue to fund regulatory budgets at current levels.

But some things have changed since December 2001, when Enron's sudden descent into bankruptcy protection rocked investor confidence and left the markets reeling. Accountants face independent oversight for the first time in 70 years. Most corporate board members take their jobs far more seriously. Wall Street is somewhat less willing to accommodate clients' interests.

Nearly a dozen experts contacted by The Washington Post, including regulators, accountants, chief executives, board members and investor advocates, agreed to fill out a corporate governance report card on the eve of the Enron trial.

The Houston energy trader's implosion exposed wide gaps in the safety net designed to protect shareholders, some of which remain today. Former executives Kenneth L. Lay and Jeffrey K. Skilling go to trial Monday on fraud and conspiracy charges.

Accountants exploited loopholes to curry favor with companies that paid their fees. Executives collected more than $400 million in salary and bonuses but denied knowing about fraud on their watch. Investment bankers engaged in sham deals to help clients meet quarterly profit targets. Boards of directors waived conflicts-of-interest policies and turned a blind eye to overly aggressive business practices. And overwhelmed regulators failed to devote enough resources to combat fraud.

Congress passed the Sarbanes-Oxley Act in July 2002, imposing new duties on corporate executives, auditors and directors. The Securities and Exchange Commission and the Justice Department spent tens of millions of dollars to root out malfeasance. Along the way, prosecutors won criminal convictions and decades-long prison terms for former leaders of Adelphia Communications Corp., Tyco International Ltd. and WorldCom Inc.

But in a sense, the government efforts may have backfired, inspiring a dangerous overconfidence among investors...

Labels: Department of Justice, Enron, Tyco

Shareholder suits down, but a new wave may be near

Sheri Qualters
Journal Staff
Boston Business Journal
Legal notebook

The number of securities class action lawsuits filed in the United States fell off last year, but experts say it's not time for companies to relax yet because a rising number of corporate restatements could harbinger a new wave of such suits. Securities fraud class actions suits slid 17 percent last year to 176 filings from 213 in 2004, according to the Stanford Law School Securities Class Action Clearinghouse. The clearinghouse also says 2005 filings are off 10 percent from the average of 195 suits between 1996 and 2004.

Investor losses also dropped sharply last year. According to the clearinghouse's disclosure, dollar loss index -- which measures the decline in the market capitalization of a company being sued during the period covered by the class action suit -- dropped 33 percent to $99 billion in 2005 from $147 billion in 2004. Losses were also down roughly 50 percent from 2001 and 2002 numbers. Although Stanford's findings are dramatic, observers in the legal community say filings have always seesawed from year to year.

The one-year decline is consistent with the alternating pattern, said Jordan Hershman, a partner in the securities and corporate governance litigation group at Bingham McCutchen LLP. What's more, Hershman said, case filings aren't driven by the amount of actual fraud. But the U.S. stock market's relative stability last year, which registered its lowest volatility since 1996, could be a factor, he said.

"Plaintiffs' class action lawyers continue to control this type of litigation, and they are driven predominantly by their own greed," Hershman said. Speaking from the other side, Glen DeValerio of Berman DeValerio Pease Tabacco Burt & Pucillo said it's too soon to tell if the one-year drop is a trend. The Boston-based firm, which represents plaintiffs in class action cases nationwide, is still plenty busy, DeValerio said.

"You could have significant frauds going on right now that have been going on over the last year (and) haven't been revealed," DeValerio said. "Enron went on for several years until the truth came out." Even one of the deans of the securities class action plaintiffs bar, William Lerach of Lerach Coughlin Stoia Geller Rudman Robbins LLP in San Diego, has been widely quoted as saying it's difficult to draw conclusions from the recent data. "The ocean comes in, the ocean goes out," said Lerach in published reports. "It doesn't feel any different to me.''

But rising earnings restatements foreshadow future lawsuits, said Bruce Carton, vice president of securities class action services at Institutional Shareholder Services Inc. of Rockville, Md. "The fact that you're getting a flurry of restatement of 2005, if it hasn't already led to lawsuits, probably will in the future," Carton said.

Investment research and advisory firm Glass Lewis & Co. LLC of San Francisco reportedly counted 1,031 restatements through the end of October 2005, compared with 650 in 2004 and 270 in 2001. Many recent restatements can be traced back to the requirements of the Sarbanes-Oxley Act of 2002, but following the new rules doesn't make companies immune to lawsuits, he said. "SOX fuels restatements, which fuels lawsuits," Carton said...

Labels: Enron, Standford Securities Class Action Clearing House

Enron trial no Lay-up - With all we know about Enron, convicting Lay and Skilling may seem like a sure win. It's not.

By Roger Parloff, FORTUNE senior writer
January 11, 2006: 12:35 PM EST
FORTUNE

Suppose as an epilogue to "The Emperor's New Clothes," the humiliated potentate had been brought up on charges of public lewdness. Putting aside sovereign-immunity issues, what should the jury's verdict be?
Well, the emperor should obviously be acquitted because he never intended to go naked in public; he really believed he was wearing something, even if he couldn't see exactly what it was.

To commit most crimes, one has to intend to do something wrong. Accordingly, truly deluding oneself -- gullibly trusting a deceitful subordinate (in the emperor's case, the tailor), relying on yes-men advisors, resting undue confidence on one's own innovative brilliance -- is a defense. An individual cannot be a criminal unless he has a certain baseline level of self-knowledge. Without that, psychiatrists may have labels for him, but the penal code does not.

At their criminal trial Jeffrey Skilling and Ken Lay will each advance defenses closely analogous to the naked emperor's: They were tragically misled, their attorneys will argue, by a small group of deceitful subordinates (chief financial officer Andrew Fastow and his minions); their actions were blessed at every turn by seemingly illustrious advisors (sycophantic accountants at Arthur Andersen, blindered lawyers at Vinson & Elkins and a passive board of directors); and perhaps, too, they got a little carried away by their own presumed innovative brilliance during the irrational exuberance of the late 1990s bubble economy.

In this context, their attorneys may suggest, the defendants believed they had discovered a legitimate business model that relied heavily upon the use of extremely complex, structured finance transactions that, in hindsight, may have proved unsound...

Labels: Andy Fastow, Enron

No Slack at Cox's SEC

By Mike McNamee
BusinessWeek
January 5, 2006

Christopher Cox's Securities & Exchange Commission isn't turning out to be the corporate-friendly place that many in the boardroom set were hoping for -- or expecting. In the SEC chairman's first major policy move, as outlined by BusinessWeek Online in late November, the commission issued standards on Jan. 4 for fining companies that commit financial fraud (see "Corporate Fines: The SEC's Search for Rules"). With that action, Cox locked in a key legacy of his predecessor -- William H. Donaldson, who angered much of Corporate America with his stiff regulation and tough enforcement -- and rejected the conservative line that corporate penalties do more harm than good.

To issue the new standards, Cox had to win over his two felllow Republicans, Commissioners Paul Atkins and Cynthia Glassman. The GOP duo often took exactly that conservative line in dissenting from civil fines imposed by Donaldson's SEC. "There was significant sentiment to go toward Atkins and Glassman," says a top former SEC staffer.

ENRON EFFECT.

That would have meant barring corporate penalties in cases where the fraud hurt only the company's own shareholders. "Instead, they stuck with the standards that we used for the last three to five years," the ex-staffer says. "That's going to disappoint some people."

Corporate penalties have long been a contentious issue within the SEC and on K Street. For years, the SEC largely accepted the argument that a company's shareholders were the biggest victims in financial fraud and that levying a fine in an SEC civil case would merely compound stockholders' pain. Before 2003, the SEC assessed only three penalties topping $50 million, all against securities firms.

That sentiment began to shift in the wake of Enron and WorldCom. The Sarbanes-Oxley corporate reform act of 2002 bolstered the case for penalties: Instead of collecting fines in the federal Treasury, the SEC now stashes them in "Fair Funds" to pay injured shareholders. That let the SEC impose mega-penalties -- topped by $750 million levied against WorldCom -- as it struggled to clean up the corporate crime wave.

"MASTERFUL JOB."

The SEC's new guidelines come out solidly behind penalties. "The chairman did a masterful job in bringing the commission to a unified position loudly and expressly" in favor of fines, says Stephen Cutler, who directed the SEC Enforcement Div. under Donaldson and is now a partner at the law firm WilmerHale.

The SEC says it will strike a balance between current shareholders, who'll bear the brunt of any penalty, and past shareholders, whose losses will be eased by Fair Funds. "We have to ask, 'If I take money from this entity, who am I hurting?'" says a senior SEC staffer. "But we also have to ask, 'Who will we help?'"

The SEC will also look at whether a company benefited directly from its fraud. In a settlement announced alongside the new standards, the agency charged that software maker McAfee (MFE ) overstated its net revenues by $622 million from 1998 to 2000, creating an inflated stock price that fueled acquisitions and other benefits for the company. McAfee, without admitting or denying the charges, agreed to pay a $50 million penalty into the Fair Funds.

ALL ABOUT CLARITY.

Companies can reduce their chances of a fine by cooperating with investigators and by cleaning house -- including firing former management. Their chances of a penalty rise if the fraud was deliberate, involved many top managers, and was harmful to innocent investors.

Cox insists that he couldn't predict how the standards will change a corporate defendants' odds of paying a fine (see BW Online, 12/1/05, "Chris Cox's Standards for Corporate Fines"). Their key value is predictability: "A penalty ought not be a matter of what the judge had for breakfast," the SEC chief told a news conference. As SEC Enforcement Director Linda Chatman Thomsen added: "Now, when we sit down with defendants, everyone will know what the standards are."

In the end, those standards aren't likely to be tougher than the unwritten rules Donaldson's SEC followed. But investors can take some comfort in the fact that they're not significantly lighter, either.

Labels: Enron

More U.S. SEC book-cooking actions hit Fortune 500

By Kevin Drawbaugh
Reuters
Dec 7, 2005 4:33 PM ET

WASHINGTON - The U.S. Securities and Exchange Commission -- once hopelessly outgunned by big business -- each year is bringing more financial reporting actions involving the Fortune 500 corporate elite, officials said on Wednesday.

In fiscal 2005, 24 percent of SEC financial reporting actions hit Fortune 500 companies, their executives or those they do business with, like auditors and vendors, the SEC said. That proportion was up from 20 percent in 2004, 17 percent in 2003 and just 5 percent in 1998, it said.

"This increase is reflective of increased staff resources over the years, as well as our willingness and ability to take on some of the largest and most complex cases," SEC Enforcement Division Chief Accountant Susan Markel told Reuters.

The figures come at a time when corporate scandals are no longer splashed across the nation's front-pages as they were in 2001-2004 after the Enron scandal. Congressional pressure for greater SEC scrutiny of large companies has eased, as well. But the latest figures show a steady increase in SEC actions against the largest companies and related parties.

For instance, healthcare services group HealthSouth Corp. -- a Fortune 500 company until two years ago -- in June agreed to pay $100 million to settle an SEC action alleging a massive 1996-2002 accounting fraud.

Media giant Time Warner Inc. -- No. 32 on the 2005 Fortune list -- agreed in March to pay $300 million to settle SEC charges that, among other things, from 2000 to 2002 it overstated its AOL online advertising revenues.

Telecommunications group Qwest Communications International Inc. -- No. 154 on the 2005 list -- in October 2004 agreed to a $250-million fine to settle SEC allegations of fraudulently recognizing revenues between 1999 and 2002.

Increased frequency of SEC actions against major companies like these has more to do with the companies themselves than with the SEC, however, said Seth Taube, a partner at the law firm of Baker Botts and a former U.S. prosecutor and SEC attorney.

"In the post-Enron world, both the SEC and the Justice Department reward self-investigation and self-reporting," Taube said, referring to recent statements from both agencies on how companies can win the government's favor by voluntarily coming forward with problems and cooperating with investigators.

"That makes the job of the SEC easier because industry itself untangles the web and presents it neatly to the commission. This is a sign that corporate America has responded" to post-Enron legal reforms, Taube said.

In an example of how the SEC is widening its focus to take in more of what it calls financial reporting "gatekeepers," Big Four accounting firm KPMG in April agreed to pay $22 million to settle SEC charges over its 1997-2000 audits of Xerox Corp. , ranked No. 132 on the Fortune list.

In a similar action, Big Four firm Deloitte & Touche in the same month agreed to pay $50 million to settle with the SEC over past audits of cable company Adelphia Communications , No. 456 on 2002's list.

The SEC brought more than 600 enforcement actions in fiscal 2005. About 29 percent were financial fraud cases, making it the biggest class ahead of others like insider trading. Revenue recognition cases are the most common type of financial fraud.

The original article appears here.

-- MDT

Labels: Department of Justice, Enron, insider trading, KPMG

U.K. Enron Bankers Say New Evidence Prevents Their Extradition

By Megan Murphy
November 28, 2005
Bloomberg

Three British bankers fighting extradition to the U.S. on Enron Corp.-related fraud charges accused the U.S. government of failing to disclose evidence that ``fundamentally undermines'' its case against them.

David Bermingham, Giles Darby and Gary Mulgrew, former executives at Royal Bank of Scotland Group Plc unit Greenwich NatWest, today told the High Court in London that the judge that authorized their extradition didn't know that Greenwich NatWest has acknowledged it didn't lose any money in the alleged fraud, which involved the sale of an Enron off-the-books partnership...

A U.S. federal court in Houston indicted the three men on seven counts of wire fraud in 2002. Prosecutors claim they misled Greenwich NatWest over the sale value of its stake in ``Swap Sub,'' an off-balance-sheet entity used to hedge Enron's investment in Internet service provider Rhythms NetConnections, gaining $7.3 million in the deal...

Labels: Enron, NatWest Three

Status of high-profile corporate scandals

November 23, 2005
By The Associated Press

A look at some of the high-profile corporate scandals of recent years and the status of legal action in each.

ADELPHIA COMMUNICATIONS CORP. -- Michael Rigas, a son of the founder of Adelphia Communications Corp., pleaded guilty on Wednesday to a charge of making a false entry in a financial record, eliminating the need for his retrial on securities fraud and bank fraud charges in a scandal that forced the cable giant into bankruptcy. John Rigas and his son Timothy were convicted in federal court last year of conspiracy, bank fraud and securities fraud. On June 20, John Rigas was sentenced to 15 years in prison, and Timothy Rigas to 20 years. They are free pending appeal. A fourth executive, Michael Mulcahey, was found not guilty of conspiracy and securities fraud. Last month, John and Timothy were indicted in Philadelphia on charges they and other family members didn't pay $300 million in taxes.

WORLDCOM INC. -- Bernard Ebbers, who as CEO of WorldCom oversaw the largest corporate fraud in U.S. history, was sentenced on July 13 to 25 years in prison. The sentence was handed down in Manhattan three years after WorldCom collapsed in an $11 billion accounting fraud, wiping out billions of investor dollars. A judge ruled in September that Ebbers can stay out of prison while he appeals his conviction.

HEALTHSOUTH CORP. -- Former CEO Richard Scrushy was acquitted on June 28 on all 36 counts of conspiracy, false reporting, fraud and money laundering in an alleged $2.7 billion earnings overstatement at the rehabilitation and medical services chain over seven years beginning in 1996. He blamed the fraud on 15 former HealthSouth executives who pleaded guilty. Hannibal "Sonny" Crumpler, a former HealthSouth executive, the second person to stand trial in the fraud was convicted last Friday of conspiracy and lying to auditors for his role in the fraud.

TYCO INTERNATIONAL LTD. -- Former Chief Executive L. Dennis Kozlowski and Chief Financial Officer Mark H. Swartz were convicted June 17 on 22 of 23 counts of grand larceny, conspiracy, securities fraud and falsifying business records. Prosecutors accused the two of conspiring to defraud Tyco of millions of dollars to fund extravagant lifestyles. The two were sentenced Sept 19 to eight and one-third to 25 years in prison. A judge refused to release Kozlowski and Swartz on bail while they are appeal their convictions.

ENRON CORP. -- Enron founder Kenneth Lay, former CEO Jeffrey Skilling and former top accountant Richard Causey are scheduled to go to trial in January on federal fraud and conspiracy charges. Former CFO Andrew Fastow pleaded guilty in January 2004 to two counts of conspiracy, admitting to orchestrating schemes to hide the company's debt and inflate profits while pocketing millions of dollars. He agreed to serve the maximum 10-year sentence, which will begin in July 2006, after he testifies against his former bosses.

Fastow's wife, Lea Fastow, completed a yearlong sentence in July on a misdemeanor tax charge for failing to report her husband's kickbacks. Former Enron treasurer Ben Glisan Jr. is serving a five-year sentence for his role in the scandal. And two former Merrill Lynch & Co. executives were sentenced to short prison terms for their roles in a bogus Enron sale of power barges.

CREDIT SUISSE FIRST BOSTON -- The company's former investment banking star, Frank Quattrone, was convicted in May 2004 on federal charges of obstruction of justice, after his first trial ended in a hung jury. Quattrone, who made a fortune taking Internet companies public during the dot-com stock boom, was sentenced to 18 months in prison. He is free on bail, appealing the conviction.

MARTHA STEWART: The founder of the homemaking empire was released March 4 after serving five months in prison, and finished serving an additional five months and three weeks of home confinement at the end of August. She was convicted in federal court last year of conspiracy, obstruction of justice and making false statements related to a personal sale of ImClone Systems Inc. stock. Her former broker at Merrill Lynch, Peter Bacanovic, served a five-month sentence and was released June 16. He still faces five months of home confinement. Stewart's conviction was not related to the company she founded, Martha Stewart Living Omnimedia Inc.

CENDANT CORP.: Former Cendant Corp. Vice Chairmen E. Kirk Shelton was convicted in January of conspiracy and securities, wire and mail fraud. He was sentenced on August 3 to 10 years in prison and ordered to pay full restitution for his role in an accounting scandal that cost investors and the company more than $3 billion. Shelton was ordered to pay $3.27 billion to Cendant including an initial "lump sum" payment of $15 million last month. Shelton delivered cash, company stock and company-funded insurance policies, a combination that Cendant said is at least $2.4 million short and fluctuates daily. Shelton stood trial with former Cendant Chairman Walter Forbes, whose case ended in a mistrial and will be retried. Four other former executives have already pleaded guilty.

Labels: 2006, Andy Fastow, Cendant, Dennis Kozlowski, Enron, Health South, money laundering, Tyco

Despite the superficial allure of criminal charges against crafty businessmen, I remain skeptical of criminal cases against anyone until I truly understand them, and the post-Enron era of the government playing to the public's resentment of wealthy business executives has only reinfored my skepticism. So, I continue to look for a coherent explanation of the details behind the government's above-described theory of the case against Mr. Bennett...so let's break this down:

RGHI owes money to Refco;

Refco makes loan 1 to the hedge fund;

Then, hedge fund makes loan 2 to RGHI;

Refco then makes loan 3 to RGHI;

RGHI uses the proceeds from loan 3 to pay the hedge fund for loan 2; and

Then the hedge fund uses the proceeds from the loan 2 repayment to repay loan 1 to Refco.

Labels: Enron, Refco

Labels: Enron

A 'surprise' for Crazy Eddie investors - After fraud dragged down the company in 1989, SEC will distribute $6 million

October 11, 2005
by Greg Saitz
Star-Ledger Staff

At some point, perhaps after seeing one of Crazy Eddie's ubiquitous advertisements insisting its prices were "insane," thousands of investors decided it was perfectly reasonable to buy stock or bonds in the consumer electronics company. It wasn't.

Now nearly 16 years after the company crashed amid a spectacular fraud, many of those investors will be getting a reminder in the mail of their ill-fated venture -- a check.

The failure of Crazy Eddie, which in its final years had its headquarters in Edison, spawned a web of civil and criminal actions against those involved. Last month, a federal judge in Newark approved a plan to disperse $6 million that securities regulators collected from members of the Antar family, primarily Sam M. Antar, who co-founded the chain with his son Eddie Antar.

Years ago, investors received other distributions totaling nearly $125 million.

"People had given up trying to get anything back a long time ago," said Rick Simpson, an attorney with the Securities and Exchange Commission who has been involved since 1989. "So any time we can make a distribution, it's a pleasant surprise."

Business headlines often mention huge settlements reached in shareholder class-action lawsuits. A judge last month approved a $6.1 billion settlement in the WorldCom case, and experts believe the Enron settlements eventually will prove to be even bigger.

But the point at which investors are actually repaid a portion of their losses comes years after the agreements. Often, rummaging to find the necessary trade confirmations and filling out claims forms is rewarded with a check that's just a fraction of the amount that was lost.

"At the end of the day, you ask, 'What's this worth?'" said James Cox, a law professor at Duke University Law School who has studied the rate at which institutional investors submit claims in class-action settlements. "Sometimes not very much."

Aside from settlements reached in class-action cases, the SEC also tries to get money back for investors. Since 2002, the agency has identified more than $4.8 billion in penalties and disgorgements that should be returned to harmed investors.

But even though regulators had collected money in 73 of the 75 cases, as of April, just $60 million from three cases had been distributed to investors, according to a recent report by the federal Government Accountability Office. Another $25 million was being prepared for disbursement, said the report, which characterized the SEC's payment to investors as slow.

Crazy Eddie investors are luckier than most. About $124 million has been distributed to not only former shareholders, but also other creditors such as Sony and an investment team that bought out the company only to discover it was rife with fraud. Estimates of investor losses were pegged at about $140 million.

Howard Sirota, a New York attorney who represented shareholders in the Crazy Eddie class action filed in 1987, said a typical recovery for investors -- after attorneys' fees -- is about a penny a share. But Simpson, from the SEC, estimated Crazy Eddie stockholders have gotten perhaps 35 cents back for every dollar they invested.

The figure includes the latest $6 million payment, which is being divided among more than 10,000 claimants. Some of those claimants are brokerage houses, which means their recoveries must be divided again among all the individual clients who owned Crazy Eddie stock.

Securities regulators first went after Eddie Antar, who now lives on the Upper East Side in Manhattan, suing him in civil court for accounting fraud in 1989, about the same time the company collapsed. The SEC then sued Eddie Antar's father, Sam, and other family members in 1993, accusing them of reaping millions in illegal profit from selling stock that was artificially high because the company was making up its financial figures.

After a 1997 trial, a federal judge in 2000 ordered Sam Antar to repay $57.5 million in ill-gotten gains and interest.

The elder Antar, who was in his 80s when he died within the past year, battled efforts to collect for years, transferring assets to his wife and others, attorneys said. By this spring, though, a receiver appointed in the case amassed $10.4 million. Costs, fees and expenses account for the $4 million difference between the amount collected and the distribution. Bruce Goldstein, a Newark attorney who represented Sam Antar in the SEC case, declined to comment.

Thousands of investors received $82.2 million via payments in 1997 and 1998, part of a judgment against Eddie Antar, who served time in prison for stock fraud after living on the run in Israel. The money was in addition to a $42 million settlement with outside auditors and others in the class-action case.

"This is, in terms of dollar-for-dollar, the best result in the history of class actions in America, but it still leaves the victims out of pocket," Sirota said. Many investors don't even bother filing claims forms to get part of the settlements. In general, about half of those eligible actually participate, said Ron Miller, a senior consultant with NERA Economic Consulting.

Sirota has a pretty good idea why more don't. "There's a justifiable, widely held belief that it's not worth the paperwork because you get back a check for $16," he said. And the apathy isn't restricted to individual investors. A study by Cox, the Duke professor, and a colleague found less than 30 percent of institutional investors -- mutual funds and other large shareholders -- filed claims to collect on these settlements.

The professors found that amount could come to more than $1 billion a year.

Labels: Crazy Eddie, Enron, New York AG

Congress' Arm says SEC Slow in Disbursing Fines

Oct 3, 2005
Reuters

The U.S. Securities and Exchange Commission has returned to investors only a small fraction of the $4.8 billion collected under a post-Enron program for penalizing violators of securities laws and returning the money to those harmed, said a congressional watchdog on Monday. The Government Accountability Office (GAO), Congress' investigative arm, also criticized the SEC for shortcomings in efforts to track collections of fines imposed on violators, as well as for its management of stepped-up collection efforts.

The GAO said in a draft report that the SEC has vigorously exploited the Fair Fund program adopted by Congress as part of a reaction to the corporate scandals that started in 2001. The program gave the SEC new power to return to investors money paid out as punishment by corporate wrongdoers. "However, to date, only a small amount of the funds have been distributed. According to SEC, distribution is often a lengthy process … We also found that SEC lacked a reliable method by which to identify and collect data on Fair Fund cases," the GAO said in the draft report's findings.

The GAO said the SEC estimated that as of April 2005 it had designated $4.8 billion in penalties and disgorgements to be returned to harmed investors. But only about $60 million had been distributed and another $25 million was being readied for disbursement at the time of the GAO's review, the GAO said.

Pennsylvania Democratic Rep. Paul Kanjorski said he was pleased the GAO found that the SEC had made some progress on collecting fines, and that some Fair Funds had been disbursed. But he said, "I am deeply troubled by the difficulties the agency has encountered in expeditiously returning these funds to American investors." He and Massachusetts Democratic Rep. Barney Frank called for congressional hearings to be held on the issue. Both lawmakers sit on the House of Representatives Financial Services Committee, which oversees the SEC.

Labels: database, Enron, GAO

Parmalat founder fraud trial opens

September 29, 2005
CNN.com
Alessio Vinci, Contributor

MILAN, Italy (CNN) -- The founder and former boss of Parmalat has appeared in a Milan court in the first major trial over the Italian dairy giant's collapse almost two years ago in one of Europe's biggest corporate fraud scandals. Calisto Tanzi and 15 others face charges of market rigging, false auditing and misleading Italy's stock market regulator and investors.

Dozens of those investors gathered outside the Milan courthouse hearing the trial as the proceedings opened. Tanzi arrived one hour late and assumed a seat in the front row. One of his lawyers said he had been caught in traffic. After about an hour in court, Tanzi left.

The trial was adjourned to December 2 to allow the court time to consider a request from investors to join a civil suit linked to the criminal case. Also on trial are three bank executives and two auditors from the Italian branch of Deloitte & Touche and the former Italian branch of Grant Thornton.

One of the defendants, Giovanni Bonici -- former chairman of Parmalat Venezuela and the Cayman Islands-based subsidiary at the center of the bankruptcy -- was one of the few of the other accused to appear in the court. "I am as much of a victim as the investors," he was quoted as saying by the ANSA news agency.

The defendants face up to 10 years in prison if found guilty. Defense lawyers said on Tuesday that Tanzi would cooperate during the trial. "He knows what his responsibilities are," Giampiero Biancolella, one of Tanzi's attorneys, told the Associated Press. "What we want is to help reconstruct faithfully what happened at Parmalat so the judge can make a decision based on that reconstruction."

The Parmalat scandal, dubbed "Europe's Enron", erupted in December 2003 when the company admitted that an account worth nearly &euro4 billion ($4.8 billion) it claimed it held in a Bank of America account in the Cayman Islands did not exist. Months of investigation followed, uncovering a tangle of offshore companies and accounts.

Prosecutors said Parmalat's old management created them to paper over a gaping debt of nearly 14 billion euros ($16.9 billion). Authorities declared the company bankrupt and overnight, tens of thousands of stocks and bonds holders were left holding worthless paper. Italian Prime Minister Silvio Berlusconi called an emergency cabinet meeting in the wake of the collapse, but measures agreed then have still not been passed into law.
Blame

As the trial began, Tanzi's lawyers submitted a list of witnesses to Judge Luisa Ponti which included the heads of such banks as Capitalia and Mediobanca, as well as market regulators Consob and the Bank of Italy. Reports had claimed Tanzi would try to shift blame for the scandal on to the banks, but Biancolella denied that. "We cannot transform ourselves from the accused into accusers," he said.

The banks have denied any wrongdoing. Earlier this year Tanzi asked for forgiveness from those who suffered as a result of the scandal. But Paolo Vivian, a pensioner who lost 25,000 euros, was not impressed. "It is ridiculous, he should have thought about it before the fraud," he said. "He could have spared us his apology because no-one has accepted it." As compensation, Vivian received shares in the new Parmalat worth around 10 percent of his original investment.

In June, 11 others including three of Parmalat's former chief financial officers, accepted plea bargains that saw them sentenced to two-and-a-half years in prison for their parts in the fraud. A fast track trial of two accountants from Grant Thornton began in January.

A government-appointed administrator, Enrico Bondi, now runs Parmalat. He has launched a series of lawsuits against banks aimed at recouping some of the investors' money lost in the crash. He also instigated a tough restructuring of the company that has seen it shake off the scandal and remain a prime player in the Italian dairy market.

Gabriel Kahn, Rome correspondent of the Wall Street Journal, told CNN: "Parmalat has come back stronger than many people might have expected. "The real hit was when the scandal broke two years ago so I'm not sure putting Tanzi on trial now will hurt the brand. It may even help by putting it back in the news."

Shares in Parmalat were suspended shortly after the collapse, but are due to be relisted next month. Anaylsts said they would be indicated to open between 2.38 euros and 2.45 euros.

Labels: Enron, Grant Thornton, Parmalat

Convicted Ad Exec Lectures on Ethics

By Ingrid Peritz
September 28, 2005
The Globe and Mail

MONTREAL -- Convicted ad executive Paul Coffin delivered his first university lecture yesterday on Business Ethics 101 -- although some argued that the more appropriate title should be Fraud 101. Mr. Coffin was convicted of defrauding the federal government of $1.55-million in the sponsorship scandal, but instead of landing behind bars, he was in front of a class of business undergraduates at a major Canadian university. He joined the ranks of university lecturers as part of his court-imposed sentence in the community, which called for sharing his insights about business ethics.

Rather than a how-to guide, Mr. Coffin, 63, offered undergrads a how-not-to guide. Standing before about 180 students at Montreal's McGill University, the businessman used a professor's tools of the trade, complete with PowerPoint presentation and an overhead projection that read: "Paul Coffin: A lesson in business ethics."

The lecture to business students was closed to the public -- security guards even papered over the classroom windows. However, in snippets overheard through the closed door, and in reports from students afterward, Mr. Coffin delivered some life lessons for budding executives. He described Ottawa's sponsorship funds as a "cookie jar" that kept on giving. "I seemed to just keep going back to the cookie jar that seemed to have no bottom and no lid," he said, according to several students.

He said the program failed to provide checks and balances. "The carte-blanche system played to my weakness." He warned the students they would encounter temptations. "Don't get sucked into mixing bad business with good," he admonished. "I fell into the trap of making easy money. Drawing a parallel to the Enron corporate scandal, he said crooked business practices "don't have to be sophisticated to be unethical and illegal."

Students said Mr. Coffin got choked up as he recalled the scandal's toll on his family. Several observers have said Mr. Coffin received a sentence that was too lenient. Quebec Superior Court Justice gave him a community sentence of two years less a day, plus a weeknight curfew of 9 p.m. Mr. Coffin has also repaid $1-million of the defrauded $1.55-million. Some students said Mr. Coffin should be in jail, not in a lecture hall. One protest poster read "What's Next? Tenure?" "To me, he's a criminal and he really shouldn't be in class," Samuel Coulombe, 20, said. "What can we learn from him? How to commit fraud?"

Labels: Enron

Questions over jail time for white-collar crime

By Andrew Ross Sorkin
September 17, 2005
The New York Times

On Monday morning, L. Dennis Kozlowski, the former chief executive of Tyco, will learn his fate. Kozlowski, who has been convicted of grand larceny, falsifying business records, securities fraud and other charges, is to be sentenced in New York Supreme Court. He faces a maximum prison sentence of 30 years.

Recent lengthy sentences for white-collar crimes have been seen, by some, as desperately needed deterrents after a deluge of corporate scandals. But the sentencing of Kozlowski, 58, comes at a time when a number of lawyers, including former prosecutors, are questioning whether such sentences are justified.

Bernard Ebbers, the former chairman of WorldCom who was convicted of masterminding an $11 billion accounting fraud that bankrupted the company, was sentenced to 25 years in prison. Because Ebbers is 63, some have contended that the sentence amounts to a life term. Shortly before, John Rigas, the 80-year-old founder of Adelphia Communications, was sentenced to 15 years in prison for his role in looting and hiding debt, in a scandal that bankrupted the cable-television company.

"You have to ask yourself whether the proof in these cases warrants such a sentence," said Otto Obermaier, a former U.S. prosecutor who worked on white-collar crimes from 1989 to 1993. Unlike Ebbers or Rigas, Kozlowski - along with Mark Swartz, Tyco's former chief financial officer who was convicted of the same set of crimes - is being sentenced in a state court. As a result, the judge in the Tyco case, Michael Obus, may have more latitude in his sentencing than U.S. judges, who have a strict set of guidelines to follow.

No lawyer is suggesting that white-collar criminals should not serve time. The question in legal circles has become what is appropriate for white-collar crimes in a post-Enron world? Jonathan Simon, a professor of law at University of California, Berkeley, said: "The most obvious comparison for the emerging attitude toward white-collar criminals is the harsh punishment we give to people involved in the drug trade. But both represent increasingly irrational and inhumane levels of punishment."

The main argument for imposing lengthy sentences is that they serve as a warning to other executives. After Ebbers's conviction in July, Alan Hevesi, the New York state comptroller and court-appointed lead plaintiff in the WorldCom securities class action, said it was "important to send a strong message" because of the billions of dollars and thousands of jobs that were lost as a result of the fraud.

Yet Simon, for one, said he had doubts about whether an especially long sentence worked as a significantly greater deterrent to potential white-collar criminals than shorter periods. He said that "it would be far more effective to impose a lot of short sentences on a wider group of offenders rather than the example model of harshly punishing a few celebrity cases while most potential offenders know that they are unlikely ever to be caught and punished."

Still, some prosecutors and lawyers suggest that lessons that were supposedly learned during the crackdown on corporate crime in the late 1980s did not stick, in part because the sentences were too lenient. Michael Milken was sentenced to three and a half years and served less than two.

Lawyers for Kozlowski and Swartz are expected to emphasize on Monday how different their cases are from those of Enron, WorldCom and Adelphia, companies that were forced to file for bankruptcy protection as a result of the crimes. Tyco never filed for Chapter 11 bankruptcy protection, and its underlying business was relatively unaffected. The two Tyco officials were convicted of stealing about $150 million by paying themselves unapproved bonuses and conspiring to keep the thefts secret.

In addition to determining a sentence, Obus is expected to make Kozlowski and Swartz disgorge the money they stole. Prosecutors may also seek to have the men pay hundreds of millions of dollars that they say shareholders lost as a result of falsified business records and the hiding of information from investors, as well as possibly millions of dollars in fines.

The original article (which first appeared in the New York Times) can be found here.

Labels: Dennis Kozlowski, Enron, Tyco

S&P Ratings a Zero - The credit rating agency ends its corporate governance evaluation service.

By Rich Duprey
The Motley Fool
Sept. 12, 2005

In the wake of the scandals that ultimately engulfed and ruined investors in Enron and WorldCom, "corporate governance" became the watch phrase of the new millennium. This new attention to corporate governance, the manner in which a public company treats its shareholders, gave us Sarbanes-Oxley, a tough, costly, and perhaps overly burdensome means of keeping a closer eye on corporate management.

Yet the need for oversight was not lost on the private sector, either, as a number of companies and organizations developed criteria for sizing up and grading management behavior. Standard & Poor's, the credit rating agency, set up its own system but is now shutting down the service, which had long been struggling.
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Other ongoing services include the Corporate Governance Quotient (CGQ) that Institutional Shareholder Services (ISS), a proxy service provider, created its for 7,500 companies, including those in the Russell 3000. Individual investors, who are probably already familiar with ISS because of its pronouncements on company mergers, can check out a company's CGQ for free on the profile page at Yahoo! Finance.

The Corporate Library also created standards by which they also could keep tabs on management, as did GovernanceMetrics International, which rates more than 3,200 firms. When GMI released its latest ratings earlier this year, companies as diverse as Air Products & Chemicals(NYSE: APD), Cooper Industries(NYSE: CBE), and twin Inside Value recommendations 3M(NYSE: MMM) and Mattel(NYSE: MAT) had all earned top honors. Of the 34 companies that earned a 10 rating, fully 27 of them were U.S. corporations.

S&P's corporate governance effort was perhaps one of the more notable. Rather than apply a standardized list of metrics to the universe of stocks, S&P created a service whereby the companies requested they be rated. S&P would then go in and analyze those companies based on criteria in four broad categories: ownership structure and influence, financial stakeholder rights and relations, financial transparency and information disclosure, and board structure and process.

The first U.S. company to be rated was Fannie Mae(NYSE: FNM), the national home mortgage enterprise, which earned a corporate governance score (CGS) of 9 out of a possible 10. Interestingly, it was the only U.S. CGS ever made public, and it was also S&P's most controversial. Following Fannie Mae's high score, the government-sponsored enterprise became embroiled in an accounting scandal of a type that the score suggested should not have arisen.

The other U.S. companies -- and there were only a handful -- did not allow their scores to be made available. In January 2002, British firm BP(NYSE: BP) was the first public company to release its S&P score -- a 9.6.

The unique nature of S&P's effort, however, was made untenable because of cost. While a dollar amount was never revealed, a rating was estimated to cost a company between $20,000 and $100,000, depending upon how intensive an analysis was performed. With the advent of Sarbanes-Oxley, and the high cost of compliance associated with that federal regulation, the ability of companies to pay for additional ratings was sorely tested. As a result, S&P also pulled its rating of Fannie Mae, which had fallen as low as CGS-6, reflecting a "deterioration in the timeliness of disclosure as the company works to complete its financial restatement."

S&P's CGS ratings formed a part of its broader credit rating analyses, and the company will roll the service up into that portion of its business. It will still monitor corporate governance issues. Considering that it was up to the end user to decide whether to make S&P CGS ratings public, the ratings' value to the investing public was probably minimal. I mean, what company earning a CGS-1 would actually publicize it? But as one of the earliest efforts in holding management accountable for how it treated shareholders, the S&P system was a worthy effort that should be recognized.

Labels: Enron

Today’s threats to American capitalism are primarily internal to the corporation, very different from efforts to monopolize external markets. Management has been changing, not always for the better. The change started with modest deviations from accepted good accounting practice, pushing the limits, such as not expensing stock options. When no resistance was forthcoming, sophisticated number games and executive self-serving became a ground swell of malfeasance. Modest dithering with the accounting tipped over into flagrant fraud. For example, technically, Enron had been bankrupt for years before its bankruptcy filing in December 2001. As we shall see, many other companies were running on fumes generated by financial engineering.

When chief financial officers privately asked the head of the Security and Exchange Commission (SEC) to make rules harder so it would be easier for them to resist the orders of their CEOs, it became obvious that some things needed to change in the 1990s.¹ They didn’t, and Americans paid a heavy price.

Concurrently, executive compensation became obscene, scandalizing Europeans who saw their executives adopting American values. Top management can be earning 1,000 times the average worker’s pay versus 50 or 100 times not so long ago, if American trends are followed. More extraordinary and more troubling, executive pay is taking a significant bite out of the net earnings of many companies—10% of the shareholder’s stake in one study!²

It appeared that the system had been rigged to favor the very few on top. They had become the beneficiaries of corporate largess, reflecting what appeared to be soaring profitability or shareholder value. We learned too late that many executive performance measures were hollow successes, highly rewarding to executives and short-lived for employees and investors. For many companies, reported earnings were more myth than reality.

These changes in executive values and decision making have consequences more serious than the loss of investor confidence and portfolio profits. What has emerged threatens the future vitality and global competitiveness of their companies. Chapters to follow look closely at the major players in this flight from excellence. Included, of course, are senior executives, corporate boards, auditors, investment bankers, and the investor community. It is also important to understand why business journalists were so slow to spot corporate deception and executive fraud, and business academics and consultants so slow to spot the failure of theories.

The following is a preview of the major forces that led to the misshaping of executive decision making and many high cost failures—to employees and investors, not executives....

Continue reading here.

- MDT

Labels: Enron

US SEC chief accountant to quit as top ranks thin

By Kevin Drawbaugh
September 7, 2005
Reuters

The U.S. Securities and Exchange Commission said on Wednesday that Chief Accountant Donald Nicolaisen will resign next month, further depleting the top ranks of the agency that got a new chairman in August. After two years on the job, Nicolaisen, 61, said he plans to return to the private sector. Before joining the investor protection agency, he was a senior partner at Big Four accounting firm PricewaterhouseCoopers. "I'm pleased that he has agreed to remain at the SEC long enough to help the agency search for a successor," said SEC Chairman Christopher Cox in a statement.

The SEC already had vacancies to head two of its four major divisions. One key job -- director of the investment management division that regulates mutual funds -- has been empty since February, when Paul Roye stepped down. The market regulation division, which oversees exchanges, has not had a permanent director since July, when Annette Nazareth was confirmed by the U.S. Senate as an SEC commissioner.

In addition, several senior enforcement staffers have quit since the White House named Cox, a former California congressman, in June to become the next SEC chairman. "It's not unusual when a new chairman comes for there to be a number of vacancies at the top," said Howard Kramer, a partner at the law firm of Schiff Hardin and a former SEC staffer. "Usually the vacancies don't last that long, and I'm sure they'll get filled in due course," Kramer said. An SEC spokesman declined to comment beyond Cox's statement.

Nicolaisen, 61, was brought into the agency by former Chairman William Donaldson, who resigned on June 30 after a little over two years on the job. The two came to the SEC after the turbulent tenure of former Chairman Harvey Pitt and his chief accountant, Robert Herdman, who resigned amid controversy over the way they handled the creation of a new accounting oversight board.

During his tenure, Nicolaisen played key roles in the debate over a new rule forcing U.S. companies to treat stock options as a business expense and in implementing controversial post-Enron Sarbanes-Oxley accounting reforms. He also announced last December that the SEC had determined Fannie Mae misapplied accounting principles and should restate its financial results, a finding that rocked the housing finance giant.

Labels: Enron

Former KPMG officials indicted: Eight accused in questionable sales of tax shelters

By Jonanthan D. Glater
New York Times

Eight former partners of KPMG, the giant accounting firm under investigation for its role in creating and selling questionable tax shelters, were named by federal prosecutors in an indictment unsealed Monday in federal court in Manhattan. The indictment is the long-anticipated next step in prosecutors' broadening investigation into shelters that from 1996 through 2002 helped wealthy investors evade billions of dollars in taxes. It is also strong evidence that the government is prepared to pursue the accountants, financial advisers, lawyers and bankers who had a hand in the transactions.

KPMG was mindful of how criminal charges wrecked competitor Arthur Andersen in an Enron-related accounting scandal. Some 28,000 workers had to find other jobs after Andersen was convicted of destroying Enron-related documents, which forced it to surrender its accounting license and stop conducting public audits. Avoiding the loss of jobs that followed Andersen's conviction was a factor in the government's decision not to prosecute KPMG, authorities said.

"The conviction of an organization can affect ordinary workers," Attorney General Alberto Gonzales said. "Justice must serve offenders and victims as well as the economy and the general public." The Supreme Court reversed Arthur Andersen's conviction earlier this year. Monday's indictment refers to unnamed foreign banks and other entities, which suggests that the government may file other criminal charges at some later date. While the banks are not identified, a 2003 report by a Senate subcommittee said that Deutsche Bank, UBS of Switzerland and HVB of Germany among others had roles in the questionable KPMG shelters. And earlier this month, a former executive in the New York office of HVB pleaded guilty to conspiracy to commit tax fraud and is presumably assisting prosecutors in their investigation.

The indictment, which names an outside lawyer along with the former partners, accuses the nine of conspiring to defraud the government by concocting "tax-shelter transactions and false and fraudulent factual scenarios to support them"; by preparing "false and fraudulent documents to deceive" the Internal Revenue Service; by preparing "false and fraudulent" tax returns that included the false tax losses; and taking steps to conceal the shelters from the IRS.

The former KPMG partners named in the indictment are: Jeffrey Stein, John Lanning, Richard Smith, Jeffrey Eischeid, Philip Wiesner, John Larson, Robert Pfaff and Mark Watson. The lawyer is Raymond Ruble. The arraignment of the nine men is scheduled for Sept. 6. Nearly all the lawyers representing the defendants and who could be reached for comment Monday said their clients intended to fight the charges vigorously.

The indictment was unsealed as a federal judge approved a $456 million settlement between KPMG and the Justice Department that allows the firm to avoid a criminal indictment, which would have been a near-certain death knell for the firm. As part of a deferred prosecution agreement that remains in effect until Dec. 31, 2006, the firm admitted wrongdoing, accepted an outside monitor, and pledged to limit its tax practice.

"The message we want to send is that if you engage in fraud, if you participate in providing false statements, you're going to be prosecuted," Gonzales said. "We want to be very, very clear: There is no company that is too big or too important an industry that will escape prosecution if they in fact engage in wrongdoing."

The agreement allows KPMG to begin to put the criminal investigation, which has been under way for more than a year and a half, behind the firm, said Timothy Flynn, KPMG's chairman and chief executive. "We regret the past tax practices that were the subject of the investigation," Flynn said in a prepared statement. But for individual former partners, the ordeal begins now in earnest — and under the terms of the agreement with prosecutors, the firm is allied against them. What strategy the partners may pursue — and to what extent they will coordinate their joint defense — is not clear.

According to the indictment, one of the defendants, Eischeid, gave "false, misleading and evasive" testimony to the IRS in 2002 about certain tax shelters. The indictment cited an e-mail message from one KPMG partner who wrote that the firm's general counsel and outside lawyer "determined that the best strategy was 'the less said the better.' " As a result, the e-mail continued, "the record will reflect repeated 'I don't knows,' 'I don't recalls,' and 'I was out of the loops' — the rope-a-dope/Enron defense."

As part of its agreement with the government, KPMG issued a strongly worded acknowledgment of wrongdoing, which can be used by prosecutors in their criminal case against the individual partners, as well as against the firm in the event it violates the terms of the deferred prosecution agreement. Lawyers for the former partners criticized the firm's statement as meaningless. "The government held a gun to KPMG's head and said, 'Say what we want or we will put you out of business,' " said Robert Hotz Jr., who represents Lanning.

Labels: Department of Justice, Enron, KPMG, New York AG

KPMG Will Pay $456 Mln Fine to Avoid Prosecution, People Say

by Ryan J. Donmoyer
Bloomberg
August 27, 2005

KPMG LLP will pay $456 million in fines under an agreement with federal authorities to avoid prosecution by the U.S. government for selling abusive tax shelters, people familiar with the matter said.

The settlement, under negotiation since June, will be unveiled in Washington on Aug. 29, the people said. The announcement may also include indictments of as many as a dozen former partners of the accounting firm, they said.

The agreement is the government's biggest victory in its fight against tax shelters that proliferated in the 1990s. Avoiding criminal prosecution may enable KPMG International's U.S. arm avoid an exodus of clients, which led to the closing of Arthur Andersen LLP after its indictment for obstruction in 2002. The deal marks a surrender for KPMG, which fought the government after rivals Ernst & Young LLP and PricewaterhouseCoopers LLP paid fines of as much as $20 million.

``KPMG elected to fight to the bitter end, and then they discovered what the bitter end was and decided, `Hey, let's not do that,''' said former IRS Commissioner Donald C. Alexander, now a partner with Akin, Gump, Strauss, Hauer & Feld, a law firm in Washington.

Under the terms of the deferred-prosecution agreement, KPMG will pay the $456 million fine in three installments, the people familiar with the matter said. The first installment, due next week, will be about half the amount. The firm will pay $100 million in June 2006 and another $100 million in December 2006.

Retraining Advisers

Attorney General Alberto Gonzales, Internal Revenue Service Commissioner Mark Everson and U.S. Attorney David Kelley will announce the settlement, the people said. U.S. District Judge Loretta A. Preska, who must approve the agreement, will hold a hearing earlier in New York.

KPMG also agreed to not take on any new tax clients for 30 days while it retrains its advisers on new standards, the people said. Under the agreement, all tax opinions given to clients must be likely to survive an IRS audit, the people said. The previous standard required that the advice be ``more likely than not'' to win IRS approval.

The New York Times said earlier today that the amount of the fine, previously reported by Bloomberg News as more than $450 million, would be $456 million.

Former Securities and Exchange Commission Chairman Richard Breeden, 55, will monitor the firm's compliance with the agreement, the people said. If the firm meets the terms of the deal, the deferred criminal charges against it will be dismissed in December 2006, the people said.

Independent Monitor

Breeden, who was appointed to the SEC by President George H.W. Bush in 1989 and served until 1993, didn't return calls for comment. KPMG spokesman George Ledwith declined to comment. Herb Hadad, a spokesman for the U.S. Attorney's Office in Manhattan, also declined to comment.

Arthur Andersen lost most of its partners and clients after being accused by the Justice Department of obstructing an investigation into its audit client, Enron Corp., the now bankrupt energy trader. Andersen's conviction, overturned by the U.S. Supreme Court in May, came too late to resurrect it and reduced the number of large accounting firms to four.

Deferred prosecutions have been on the rise since the Enron bankruptcy in December 2001 kicked off a wave of investigations into corporate fraud. Computer Associates International Inc., Bristol-Myers Squibb Co., Time Warner Inc. and American International Group Inc. made similar arrangements to avoid criminal charges in the last two years.

KPMG has about 1,600 partners and reviews the books of more than 1,000 companies including General Electric Co. and Pfizer Inc.

`Full Responsibility'

In a June statement, KPMG said that the firm has stopped selling abusive tax shelters and that it took ``full responsibility for the unlawful conduct by former KPMG partners'' from 1996-2002.

The KPMG shelters were sold to wealthy individuals such as former Treasury Secretary William Simon Sr., the late stock car racing champion Dale Earnhardt and Thomas Frist III, the brother of Senate Majority Leader Bill Frist. None of the individuals has been accused of wrongdoing.

The U.S. Senate's Governmental Affairs Permanent Subcommittee on Investigations concluded in November 2003 that accounting firms sold illegal shelters because the penalties for doing so were minuscule compared with the fees they earned.

Labels: Department of Justice, Enron, KPMG, New York AG

U.S. Department of Justice Corporate Fraud Task Force Fact Sheet

8/29/2005 2:29:00 PM

To: National Desk

Contact: U.S. Department of Justice, 202-514-2007 or TDD 202-514-1888

WASHINGTON, Aug. 29 /U.S. Newswire/ -- The following is a fact sheet released today by the U.S. Department of Justice:

FACT SHEET: CORPORATE FRAUD TASK FORCE

Since its creation by Executive Order in July 2002, the Corporate Fraud Task Force (CFTF) has spearheaded the Administration's effort to prosecute corporate malfeasance, protect the jobs of hard-working Americans, and restore confidence to the marketplace. Through the coordinated efforts of several federal agencies, the CFTF is sending a clear message that criminal activities in the corporate world will be swiftly and decisively prosecuted. By acting to deter fraud, the Task Force is also helping to restore shareholder and employee trust, and demonstrating to the American people that the vast majority of corporate leaders are still honest and hardworking. With today's deferred prosecution agreement with KPMG LLP, and the indictment of nine former employees and individuals associated with KPMG-as well as one former partner of a prominent law firm-the Justice Department furthers its commitment to the American worker, investor, and honest taxpayers.

Since its inception, the Task Force has contributed to the following:

-- Securing over 700 corporate fraud convictions;

-- Convicting over 100 corporate CEOs and presidents with some type of corporate fraud crime in connection with close to 600 filed cases;

-- Convicting more than 80 vice-presidents;

-- Convicting more than 30 CFOs; and

-- Charging more than 1,300 defendants, including the indictment announced today.

-- From June 1, 2002 through June 30, 2005, more than $266 million has been collected in restitution, fines, and forfeitures from corporate fraud convictions.

-- Significant cases prosecuted criminally include, among others: Worldcom Chief Executive Officer Bernard Ebbers, convicted on fraud charges in the Southern District of New York; a deferred prosecution agreement with America Online in the Eastern District of Virginia; Adelphia Chief Executive Officer John Rigas, convicted on charges of securities fraud, bank fraud, and conspiracy in the Southern District of New York; a deferred prosecution agreement with Computer Associates, prosecuted in the Eastern District of New York.

-- The Justice Department's Enron Task Force has obtained charges against 33 Enron defendants, including 21 former Enron executives, obtained the convictions of 11 Enron defendants, including its former CFO and treasurer, and seized over $162 million for the benefit of victims of the frauds at Enron.

-- Federal prosecutors working with the CFTF have entered into a variety of agreements with corporations regarding allegations of fraudulent criminal activity, including guilty plea agreements, deferred prosecution agreements, and non-prosecution agreements. These agreements, such as the deferred prosecution agreement with KPMG today, ensure the company admits its conduct, agrees to real reforms-including full cooperation in ongoing investigations-and the establishment of internal controls to prevent criminal conduct from re-occurring. In cases where the company fails to agree to these conditions, or fails to abide by the terms of such an agreement, the Department of Justice will not hesitate to prosecute the company.

The work of the CFTF is ongoing. The Task Force will continue to successfully:

-- Restore confidence to the marketplace;

-- Provide fair and accurate information to the investing public;

-- Reward shareholder and employee trust; and

-- Protect jobs and savings of hard-working Americans.

Labels: Department of Justice, Enron, KPMG

Group Seeks Suits Against Plaintiffs Firms

Justin Scheck
The Recorder
August 29, 2005

A prominent tort reform group has a new idea for attacking out-of-control litigation: more lawsuits. That was the theme of an online seminar Thursday morning by the conservative Washington Legal Foundation, the champion of free markets, constraints on litigation and rollbacks of government regulation.

The group -- which has become known for filing objections to plaintiffs lawyers' fee requests -- is now advocating for a new type of litigation: shareholder suits against plaintiffs lawyers famous (they would say infamous) for bringing shareholder suits. The occasion, of course, is the highly public federal investigation of the plaintiffs firm formerly known as Milberg Weiss Bershad Hynes & Lerach.

As prosecutors continue to pursue former lawyers of that firm -- it split up last year, with San Diego-based star partner William Lerach forming his own firm, Lerach Coughlin Stoia Geller Rudman & Robbins -- the Washington Legal Foundation aims to piggyback on the allegations by giving the country's top shareholder plaintiffs attorneys a dose of their own litigiousness.

"A taste of their own medicine might be poetic justice," said Paul Kamenar, the group's senior executive counsel and an outspoken critic of securities litigation. The muse behind Kamenar's idea for litigious poesy is Seymour Lazar, the lead plaintiff in many Milberg Weiss suits who was indicted by federal prosecutors in June for allegedly taking payments from the firm (Milberg Weiss and its former lawyers have not been charged).

In his Thursday morning seminar, Kamenar suggested that allegations in that indictment could form the basis for a wide range of suits by former class members from Milberg Weiss suits. "To the extent that shareholders were either defrauded or misled," he said in an interview Wednesday, "or kickbacks were given, there should be some liability, to be sure."

For example, Kamenar said the former class members could sue over fraud claims, unjust enrichment, breach of fiduciary duty (if lawyers put lead plaintiffs' interests ahead of the rest of the class) and -- for good measure -- civil Racketeer Influenced and Corrupt Organizations Act violations.

In the seminar, titled "Trial Lawyers' Enron" after a Wall Street Journal editorial about the indictments, Kamenar criticized the plaintiffs lawyers and spent time discussing a suit in San Francisco federal court that the Washington Legal Foundation has been researching for years.

In that U.S. district court case, Henry v. Terayon, 00-CV-1967, Lerach's named plaintiff is a short-seller, who, Kamenar said, worked to drive down a company's stock price and then sued executives over the fraud that allegedly caused the price to drop. The SEC, he said, is investigating the case.

Kamenar -- who conducted the seminar solo, since another scheduled panelist canceled at the last minute -- said afterward that he's optimistic about the chances of suing the plaintiffs lawyers. "We would be prepared to file such a case," he said. "The foundation is looking to file such a legal action."

Joseph Grundfest, a securities expert at Stanford Law School and frequent critic of the plaintiffs bar, said Thursday that he has heard little about the idea of private civil suits in connection with the federal investigation. "All of this seems premature until we know what allegations, if any, are going to be made against the firm and individual attorneys," he said.

And Robert Lieff, a securities plaintiffs lawyer and partner at Lieff Cabraser Heimann & Bernstein, agreed. "I hadn't thought about it," he said. "It seems bizarre to me." But to Kamenar, bizarre or not, the idea has irresistible appeal. "It would be kind of ironic," he said in the seminar, "to have a class action against Milberg Weiss."

Labels: Enron, Standford Securities Class Action Clearing House

Voice Mail Poses Threat, but Gets No Respect

By Fred J. Aun
Ziff Davis Internet
August 26, 2005

If you shudder at the thought of a jury or government investigator reading your company employees' e-mails, consider what it would be like when indiscreet voice mails are played back in open court. In the appendix of their book, "The Practical Guide to Electronic Discovery," attorney Mary Mack and technology expert Matt Deniston provide readers with a collection of "electronic discovery templates."

Lawyers are urged to use the forms as guides when requesting information from adversaries in lawsuits. As might be expected in these post-Arthur Andersen/Enron days, the electronic discovery templates are for use when seeking e-mails stored in company computers. But Page 122 includes a carefully worded sample request that might catch even the most modern company off guard:

"Produce any and all voice messaging records including, but not limited to caller message recordings, digital voice recordings, interactive voice response unit (IVR/VRU) recordings, unified messaging files and computer-based voice mail files to or from [specified parties] for the period _____ to _____."

The inclusion of that template in the book is one indication among a growing number that, like it or not, voice messages are increasingly considered fair game by lawyers. "Voice mail is often a quick and casual way to communicate, but it is serious business in the world of discovery," wrote April Berman, Mary Ann Miranda and Sonya Smith in an article called "Voicemail: The Other Smoking Gun."

The authors wrote for the American Bar Association's Litigation News, and posted on the Web site of their employer, the law firm of Baker, Donelson, Bearman, Caldwell & Berkowitz. The piece offers an unsettling reminder: "When a live voice mail is played for a jury, the jury hears not only the witness' words, but the tone, expression and other subtle cues inherent in speech." In other words, your PBX just might be a legal minefield.

Many attorneys involved in the growing field of "electronic discovery" agree that it's prudent for companies to treat voice mail messages as business records on par with e-mail. That means government investigators or civil practice lawyers searching for damaging evidence are increasingly likely to ask for those messages.

So far, both government and corporate attorneys have avoided the issue of voice mail files as evidence. But compliance and legal experts are increasingly worried that it will become the next major minefield in corporate litigation. Some companies pin their hopes on expectations that judges will deem it "unreasonable" to ask businesses to retain the thousands of voice mails recorded daily. Indeed, companies are not expected to forever retain every record they generate.

Still, Michele Lange, a staff attorney specializing in electronic discovery for security firm Kroll Ontrack Inc., said lawyers and company executives are nervously awaiting the court case that will "blow the door off" the voice mail topic. Such a case would entail a precedent-creating judicial opinion approving or denying a request for a company to produce all its discoverable voice mails.

So, if this is the calm before the storm, should companies make a point of archiving and otherwise nurturing the myriad voice messages they receive? "Maybe," is the bottom-line advice of Steven Bennett, an attorney who writes about electronic discovery. "We should think about what we're doing," he said. "The question is, are you going to think about it in advance or will you wait until something happens in the course of litigation and then try to make up a system after the fact?"

Labels: Enron, Kroll

Wall Street's private eye

Vanson Soo
The Standard
August 29, 2005

Jeremy Kroll rolls his eyes when someone attempts to portray him as a second-generation private eye, even though his family name is as synonymous with the modern profession of risk consultancy and investigations as Pinkerton's once was with detection.

Still, the 34-year-old son of the man who founded Kroll Associates, who works under his father as managing director of global business development and strategy of the company's consulting services group, acknowledges that something akin to the film noir gumshoe spirit does run in his family.

``Back when my dad started the business, my grandma spent a week tailing a subject in her car, changing her outfit every day to make herself harder to spot,'' he says, smiling at the recollection.

``My family is full of curious people, and that has not changed.'' The patriarch, Jules Kroll, now 64, is a former Manhattan assistant district attorney who came to believe that a lot of the time and money spent prosecuting corporate crime would be better spent trying to prevent it. With that in mind, he set up the company in 1972.

Though the company was sold last year to insurance giant Marsh & McLennan, Jules Kroll remains its executive chairman. The younger Kroll, who was in Hong Kong earlier this month to visit clients, graduated in French, Italian and fine arts from Georgetown University in Washington, DC, the same school where his father got his law degree.

A family man, he's the eldest of four children; his sister, Dana Kroll, also works at New York headquarters as an associate managing director. In nine years with the firm, Jeremy Kroll has risen from investigator in the areas of corporate intelligence and due diligence to head of a division with more than US$500 million (HK$3.9 billion) in annual revenue.

If Kroll Associates enjoys some cloak-and-dagger mystique, it's probably because of the large number of ex-police, military and intelligence officers Jules Kroll originally hired to lend his new company credibility.

Nowadays, its recruits are just as likely to be computer nerds, lawyers, accountants and investment bankers. The company has spread far beyond its beginnings in investigative and security services. Today, its four primary business segments are consulting, corporate advisory and restructuring, background screening and technology services.

"Technology is a big growth area,'' Jeremy Kroll says. "Computer forensics is a major weapon in our arsenal.'' The company glories in its reputation as "Wall Street's private eye,'' a firm that multinationals, and on occasion even the US government, are comfortable entrusting with their most sensitive affairs.

It burnished its reputation in the early 1990s, successfully tracking down millions of dollars of assets concealed by political outlaws like Jean-Claude Duvalier of Haiti, Ferdinand and Imelda Marcos of the Philippines, and Saddam Hussein of Iraq. Less glamorous, but probably more typical of the way Kroll earns its bread and butter, is its mandate, bestowed in 2002, to restructure Enron, the fallen angel of the US energy business.

Kroll booked US$900 million in turnover last year and currently employs more than 4,000 people in 65 offices worldwide. Kroll files says the company's security work revolves mainly around emerging markets. ``In some industries, such as oil and energy, there is a need for companies to be in `bad neighborhoods' where it's dangerous to business.''

Does that include China? Not really, he says. If China were considered that dangerous, he adds, would Yahoo! ever have invested, as it did recently, US$1 billion (HK$7.8 billion) to acquire a 40 percent stake in Alibaba, a narrowly focused Internet outfit in a speculative industry that last year earned just US$46 million?

``Overall, we have seen a maturing view of Greater China over the past five to 10 years, as experience and confidence have increased,'' he says. Though in earlier years, China may have been just another bandwagon on which globetrotting companies were expected to jump, it has since moved up the charts to become an integral part of many global strategies.

With that, the level of risks has risen proportionately. ``We get daily phone calls from American and European companies about troubles that are threatening their joint ventures in China,'' Kroll says. The China concerns of Kroll's clients today fall very broadly into three categories - transactional risks, regulatory risks and operational risks. Transactional risks relate to joint ventures and partnerships.

Regulatory risks are those inherent in a company's dealings with Chinese authorities, and operational risks involve issues like technology, supply chains and general ambiguities associated with doing business in the mainland, for example, intellectual property protection.

Kroll also advises on political and societal risks that tend to become more important for companies as their mainland roots deepen. "Kroll helps clients understand their markets a lot better, and to recognize that China is becoming an influential player in the global marketplace,'' he says.

Financial institutions are also rushing headlong into the mainland but many are plagued by doubts about their clients - as basic, in some cases, as whether they are real or fictitious. "The real ownership structure of a company and who's behind them are issues that must be dealt with.''

Establishing title is a major headache for real estate investors. Shell companies abound, and it is often unclear just who owns what. I ask Kroll what, after a decade in the company, is his most memorable experience? Surprisingly, it has nothing at all to do with catching someone red-handed in a headline-grabbing scandal. "No. It's the recovery of a kidnapped child. It happened when I was in my late 20s. The feeling of returning a child safely to his family is beyond description.''

Finally, I can't help asking him if it's true, as some people have suggested, that Kroll people carry guns when they're in China. "No way,'' he says, laughing. ``The only people in the company who ever carry guns are those involved in personal security protection, but they've never been deployed anywhere in Greater China.''

That's a pretty good indication that Hong Kong and China are not all that dangerous as places to do business.

Labels: background checks, China, Enron, Kroll, New York AG

JP Morgan pays $1bn to settle Enron claim

David Teather in New York
Wednesday August 17, 2005
The Guardian

JP Morgan Chase agreed yesterday to pay $1bn (£550m) to settle claims brought against it by Enron, bringing the total cost of the Wall Street bank's brush with the notorious energy firm to $3.2bn. The latest settlement will put further pressure on those banks that Enron has an outstanding claim against, including Barclays.

Enron filed suit against 10 banks, accusing them of helping the energy company's former management to commit fraud. Enron filed for bankruptcy in December 2001 amid allegations that it routinely hid debts and inflated revenues and earnings through a series of complex off-balance sheet deals. Almost four years later, the scandal continues to cast a long shadow over both the finances and the reputation of Wall Street.

JP Morgan agreed to pay $350m in cash and to forgo certain claims in Enron's bankruptcy proceedings, bringing the settlement to about $1bn. "We have put behind us another significant piece of our Enron exposure," said the bank's chief executive, William Harrison. The firm agreed in June to pay $2.2bn to settle a class-action lawsuit filed by former investors in Enron.

The Toronto Dominion Bank also announced a settlement with Enron yesterday and said that it would pay $70m to resolve the allegations that it helped the company commit fraud. Enron has now recovered about $735m in cash in what the company calls its "mega-claims" litigation. In earlier settlements, Royal Bank of Scotland agreed to pay $41.8m; Canadian Imperial Bank of Commerce will pay $250m, and Royal Bank of Canada will pay $25m.

"These are tremendous results for creditors and they will certainly add to their distributions," said John Ray, Enron's board chairman. He said talks were continuing with the remaining five banks that had not settled and that the latest agreements "give us momentum". The company emerged from bankruptcy late last year and now exists to liquidate assets and pay debts. Before its collapse, Enron was once the seventh-largest company in the United States.

The Enron scandal rewrote corporate law in the US and the government has worked aggressively to pursue its former executives. Convictions have been secured against a handful of former Enron employees with the biggest catch yet being the former chief financial officer Andrew Fastow, who is facing 10 years in prison after pleading guilty to fraud. The most eagerly anticipated trial - of the former chief executive Jeffrey Skilling and the former chairman Ken Lay, who was once a friend of President George Bush - is scheduled to begin early next year.

The shareholder lawsuits against Enron's former advisers have accused the banks of helping the energy firm to mask its true financial state and to continue selling equities and bonds to investors even as it headed towards bankruptcy. In August, the Canadian Imperial Bank of Commerce agreed to pay investors $2.4bn, bringing the total amount recovered from banks on shareholders' behalf to $7bn. In the investor lawsuit, Citigroup has paid $2bn.

A number of banks holding out against the suit brought by Enron - Barclays, Credit Suisse First Boston, Merrill Lynch and Deutsche Bank - have also yet to settle the class-action suit that was brought by shareholders. The other firm that has yet to settle the Enron suit is Citigroup, while Royal Bank of Scotland is among the banks that have not yet settled the shareholder lawsuit. William Lerach, the lawyer representing the former Enron shareholders, has warned that the longer the banks hold out against reaching a settlement, the more they will be forced to pay eventually.

Labels: Andy Fastow, Enron

JPMorgan, Toronto Dominion settle 'Megaclaims' suit

August 16, 2005
Business Week (AP)

Two banks agreed on Tuesday to pay at least $420 million to settle their parts of the "Megaclaims" lawsuit filed by Enron against 10 banks, alleging they "aided and abetted fraud" and could have prevented the energy trader's collapse.

JPMorgan Chase & Co. agreed to pay $350 million in cash to Enron while Toronto Dominion Bank agreed to pay $70 million. The companies also will forego certain claims in Enron's bankruptcy proceedings while agreeing to pay more money to Enron for the ability to pursue others.

Enron said the bankruptcy claims that are part of the JPMorgan settlement have a value of $660 million, and that the settlement with JPMorgan could reach up to $1 billion. Toronto Dominion agreed to forgo claims value at almost $56 million, while paying $60 million to allow claims valued at $320 million that the company transferred to third parties....

Labels: Enron

Chilling expose` dives into murky waters

August 14, 2005
REVIEW BY JAMES PRESSLEY

William Brittain-Catlin, a former investigator for Kroll Associates Inc., nurses a dark vision of capitalism.

'Offshore' - THREE STARS out of four

By William Brittain-Catlin

Capital, as he describes it, is a protean beast, a "wild animal let out of a cage." The nation state has become "a servant of stateless capital," its citizens suppressed by the "controls of bourgeois capitalist society, in particular the work ethic."

Never mind his hyperventilating style. "Offshore: The Dark Side of the Global Economy" is a convincing description of a perverse world in which capitalism is a giant shell game, where mainstream multinationals shunt assets and liabilities around the globe to evade taxes, hide debt and buy political favor. The fall guys for this scam are shareholders, taxpayers and society at large.

"Offshore" has many strengths, offering a solid primer on how capital slithers in and out of brass-plate subsidiaries as companies ranging from GE and Wal-Mart seek to lower their taxes. The author chooses to bring offshore finance into focus through the lens of the Cayman Islands. The sun-soaked British dependency proves an effective setting for this dark drama, as Brittain-Catlin combines snippets of the Caymans' seagoing past (Columbus, turtles and Blackbeard the Pirate) with its role in the collapses of companies such as Enron Corp.

In lean prose, the author captures the convoluted story of U.S. energy trader Enron in 20 pages and boils the fraud at Italian food company Parmalat down to nine. The summations create crisp snapshots on how multinationals funnel profits offshore even as they milk governments onshore.

Enron, for example, used hundreds of Cayman subsidiaries to slash its U.S. taxes and hide losses. The Houston-based company also used its clout, including a friendly connection to President George W. Bush, to keep the government from regulating energy-derivatives trading, he says.

Enron combined offshore freedom with the kind of onshore protection that prompted government bailouts of Chrysler Corp. and the entire U.S. savings and loan sector. "The modus operandi for the corporation is to pass the cost of its losses onshore onto society and its taxpayers, while the corporation runs off with the profit and parks it offshore," Brittain-Catlin writes.

The same dichotomy lies at the heart of the success of Lakshmi Mittal, the author says. The Indian magnate created the world's biggest steel company -- with mills from Cleveland to Kazakhstan -- through offshore holding companies in tax havens such as the Netherlands Antilles. Yet he built Mittal Steel Co. with the help of politicians like U.K. Prime Minister Tony Blair and soft loans from the European Bank for Reconstruction and Development.

"Offshore" blames this mess on Western philosophy. Brittain-Catlin traces the roots to Immanuel Kant, who argued that the individual had absolute moral autonomy -- a vital bulwark against the utilitarianism of the age. Along the way, though, this freedom was subverted in the struggle against absolutism, the author argues. Political freedom suppressed individual rights, forcing us to conform with bourgeois mores. "What was billed as freedom in fact turns out to be a pretext for coercion," he says.

It doesn't take too much imagination to draw a line from the age-old urge for autonomy to a modern German's desire to protect himself from punitive taxation by dragging a suitcase full of cash to a bank in Luxembourg. Unfortunately, Brittain-Catlin muddies the argument with a sometimes-tortuous line of reasoning that leads from Greek mythology to the hypocrisy of the European bourgeoisie. Equally irritating is the author's failure to offer any solution. He challenges neocons and reformists alike, yet offers no answers of his own.

One thing is clear: Brittain-Catlin rejects the argument that there is a legitimate use for offshore finance. "A distinction cannot be made," he says, "between the use and abuse of offshore tax havens any more than it can be made between the light and dark side of the international financial system." That distinction, made routinely by bankers and accountants, has worn thin in our age of terrorism, money laundering and corporate fraud. Bankers may bristle at Brittain-Catlin's rhetoric; they cannot ignore his message.

Labels: Enron, Kroll, money laundering, Parmalat

SEC ponders Big Four minus one: report

August 11, 2005: 9:07 AM EDT

NEW YORK - Securities and Exchange Commission officials are discussing possible steps in the event of a collapse of one of the Big Four accounting firms, The Wall Street Journal reported Wednesday.

The talks, which began after the demise of Arthur Andersen three years ago, have taken on greater importance in the wake of news that the Justice Department may indict KPMG LLP for allegedly peddling illegal tax shelters.

The SEC is considering making it easier for companies to switch auditors in the event KPMG or another Big Four firm is indicted or collapses, the Journal said, but no formal plan has been approved. According to the newspaper, the SEC is trying to put a contingency plan in place to aid companies that would need to move quickly to find a replacement auditor.

Any plan would have to be approved by SEC Chairman Christopher Cox, the newspaper said. "We have scenarios in place for any eventuality that could come out of this, and we're prepared to deal with it," an SEC official said, according to the newspaper.

The Big Four -- KPMG, Deloitte & Touche LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP -- audited more than 78 percent of public companies in the U.S., according to a report cited by the newspaper.

Labels: Department of Justice, Enron, KPMG

Disney suit altered the legal landscape

Financial Times
August 11, 2005

Just over two years ago, shareholder activists still reeling in the wake of the corporate meltdowns at Enron and WorldCom celebrated a decision by Judge William Chandler that they believed would herald a new era of accountability in US boardrooms.

By ruling that investors could bring a case against Disney's board for approving a $140m severance package for Michael Ovitz, fired after just 14 months as Disney president, Judge Chandler was sending a distinct message: directors could be held personally liable if they failed to live up to their fiduciary responsibilities. The decision was unique, in part, because it did not require directors to have personally benefited from poor decision to hold them financially accountable.

The 2003 ruling reverberated far beyond the Disney case, creating a legal landscape that encouraged investors in companies ranging from Hollinger to AIG, the insurance giant, to mount legal challenges against boards after allegations of corporate malfeasance, and boardroom acquiescence.

But the 2003 shareholder victory, which simply allowed the case to go to trial, hit a snag on Tuesday, after Judge Chandler ruled that the Disney board could not be held liable for approving Mr Ovitz's severance package.

Corporate governance experts yesterday said Judge Chandler's ruling was not, ultimately, as signficant as his decision to allow the case to be heard in the first place. "This affects everything. The issue was the standard of law that [Chandler] created and that he allowed it to go to trial," said Charles Elson, head of the Weinberg Center for Corporate Governance at the University of Delaware. Mr Elson says that the Chandler decision does raise a high bar for monetary liability for directors, but also "opens a door" for shareholders by creating a duty of good faith.

Robert Curry, a member of the Board of Advisors of Columbia Law School's Center on Corporate Governance, said Judge Chandler, in emphasising that his finding that the Disney directors acted in good faith was dependent on the unique facts of the case, made it easier for shareholders in the future to be heard when challenging actions of their directors.

The Disney case also contrasts another lesser-known ruling in Delaware last year, when Judge Jack Jacobs ruled that a director of a US Virgin Islands-based telecoms group, Emerging Communications, was personally financially liable for approving a transaction that was not in the interest of investors because he knew "or at the very least had strong reason to believe" that the price was unfair.

In making his judgment, Judge Jacobs ruled that the director's "specialised financial expertise" he had previously worked as a securities analyst for Lazard and Gabelli & Co meant that he had "consciously and intentionally disregarded" his responsibilities.

Labels: AIG, Enron

Another year, another scandal

Aug 4th 2005
The Economist Global Agenda

The latest scandals over a contested bank bid show that Italy has learned little from the spectacular collapse of dairy group Parmalat. The country’s reputation as a sensible place in which to invest has been badly damaged. But don't expect the government to do much about it.

Less than two years ago, the spectacular bankruptcy of Parmalat, a family-controlled Italian dairy group, sent shock waves throughout Italy. It was the biggest scandal in European corporate history, revealing a €14 billion ($17 billion) accounting hole that had grown over a decade of deception. The saga cast regulators, bankers and auditors in a desperately unfavourable light for not spotting the fraud much more quickly than they did.

Europe’s Enron offered a chance for the comprehensive reform of Italy’s financial regulation that it so badly needs. Yet the growing scandal over the contested bids for Banca Antonveneta by Banca Popolare Italiana (BPI) and ABN Amro, a Dutch bank, shows that this opportunity was instead comprehensively missed...

Labels: Enron, Parmalat

Enron Settlements Hit Record $7 Billion

With the Canadian Imperial Bank of Commerce's $2.4 billion settlement, the energy giant pulls ahead of WorldCom. Also, Credit Suisse bulks up Enron litigation reserves.

by Stephen Taub, CFO.com
August 03, 2005

Canadian Imperial Bank of Commerce's agreement late yesterday to pay $2.4 billion to settle a securities fraud class-action suit stemming from Enron Corp.’s bankruptcy brought the total amount recovered in litigation involving the company to $7.12 billion, according to William Lerach, of Lerach Coughlin Stoia Geller Rudman & Robbins LLP, counsel for the University of California’s Board of Regents, the lead plaintiff.

The amount tops the $6.1 billion awarded to WorldCom investors, making the Enron settlements the largest sum ever recovered in a group of securities class-action lawsuits.

The CIBC pact is the largest settlement in the Enron litigation. Officials at the University of California alleged that CIBC participated in an elaborate scheme to defraud investors by helping Enron to inflate earnings, according to press reports.

CIBC management noted that the settlement does not include any admission of wrongdoing, and that the company agreed to the settlement solely to eliminate the uncertainties, burden, and expense of further protracted litigation. “By settling this case and maintaining what we believe are adequate reserves for our remaining Enron related legal issues, we can better focus our energies on our other priorities,” said Gerry McCaughey, president and chief executibe officer.

Through its Enron-related suits, The University of California has also recovered $2.2 billion from JPMorganChase, $2 billion from Citigroup, $222.5 million from Lehman Brothers, $69 million from Bank of America, $168 million from Enron’s outside directors, and $32 million from Andersen Worldwide.

The University will also secure a distribution of about $32 million for investors through the bankruptcy proceeding for the LJM2 partnership that was used as part of the Enron scheme to hide losses and inflate earnings....

Labels: Bernstein Litowitz and Berger, Enron, Sean Coffey

Ex-KPMG partners may face charges

AP Newswire
August 3, 2005

NEW YORK (AP) — As many as 20 former partners at accounting firm KPMG have been told by federal prosecutors that they could face criminal charges for their roles in selling questionable tax shelters in the 1990s, according to a published report.

Prosecutors have not yet decided if they will charge the firm itself with any crimes, but currently are focusing on individual executives who were involved in the tax shelters, including some members of KPMG's senior management, according to a report Wednesday in The Washington Post. The report cited sources who spoke on the condition of anonymity because of the "delicate stage of the investigation."

The shelters in question have names such as OPIS, FLIPS and BLIPS, the newspaper said, and were used by wealthy clients as ways to report losses on their tax returns in order to offset big gains.

Among those being probed are New York-based KPMG's former deputy chairman and the former heads of its tax services unit and its Washington-based national tax practice, the Post reported, without naming them. Many of the KPMG partners said they had not broken the law but only exploited loopholes in the tax code, according to the Post.

The investigation has been underway for several years but a resolution could be just weeks away, according to the newspaper.

Federal prosecutors in New York recommended earlier this year that the firm face criminal charges, but senior officials in the Justice Department were worried about the possibility of another big accounting firm collapsing after the 2002 fall of former Enron auditor Arthur Andersen LLP, the Post said.

In response to the report, KPMG spokesman Tom Fitzgerald on Wednesday referred to a statement released by the company on June 16 in which it said it was cooperating with the probe and "takes full responsibility for the unlawful conduct by former KPMG partners during that period (1996-2002), and we deeply regret that it occurred."

The statement said KPMG does not provide the shelters any more, has introduced reforms within the company to ensure high ethical standards and "put in place a process to ensure that those responsible for wrongdoing have been separated from the firm."

The original article appears here.

KPMG also has a few other irons in the fire, including a $65 million pension deficit, as described in this Financial Times article (subscrip. required).

Another interesting article appearing in the venerable FT that you actually CAN read without a subscription is this one, which describes how new international accounting standards (the International Financial Reporting Standards to be exact) are going to negatively impact the big four accounting firms because of the way they the standards address the firm's base capital. The FT can explain the sitch a lot better than The Daily Caveat..cue the bloc quote:

Under IFRS, the capital paid in by firms' partners, the bedrock of their finances, is likely to be reclassified as long-term debt, which will seem to make assets vanish and liabilities soar. The change will put the big four in the uncomfortable position of having to play down the significance of accounting changes that critics have accused them of playing up to generate business. Partner capital is expected to be reclassified to recognise the fact that when partners leave the firms they are repaid the funds they put in upon joining. The change, however, would have no bearing on the big four's financial strength, profitability or ability to pay creditors.

-- MDT

Labels: Enron, KPMG

Bush nominee insists he will stay true to SEC mission of investor protection

By Andrew Parker
July 27 2005

Christopher Cox, the Republican congressman chosen by President George W. Bush to be the next chairman of the Securities and Exchange Commission, yesterday insisted he would stay true to its mission of investor protection. He promised vigorous enforcement of the securities laws, and signalled he would not seek to undo ambitious rules for capital markets introduced by William Donaldson, who resigned as SEC chairman last month. Mr Cox also said he would try to put an end to divisions at the financial regulator that dogged Mr Donaldson's tenure.

In his first public comments about the SEC since Mr Bush nominated him last month, Mr Cox told the Senate banking committee: "My top priority will be vigorous enforcement of our nation's securities laws. The Commission must be vigilant on behalf of investors." Some investor groups fear Mr Cox could pursue a deregulatory agenda because of his business-friendly record in Congress, which could lead him to unpick Mr Donaldson's ambitious reforms of mutual fund governance, hedge fund oversight and stock trading rules.

But Mr Cox said Mr Donaldson's record was "one of great achievement". "I would hope to build on that and extend it," he added. He also signalled he would not seek to scrap a controversial accounting rule that requires companies to treat awards of stock options as expenses and make deductions from profits. Mr Cox opposed the accounting standard in Congress but he said the rule had been debated and should be implemented as the financial markets expected.

Yesterday's hearing could pave the way to the Senate confirming Mr Cox's appointment, together with two Democratic nominees to the SEC, before the weekend. Mr Cox strongly endorsed the 2002 Sarbanes-Oxley law on accounting and corporate governance, passed in response to corporate scandals such as Enron. Mr Cox made no commitment to reforms, but he expressed an interest in giving investors more information about executive pay. He also said he was willing to revisit the issue of giving shareholders more powers to nominate directors to troubled companies.

Senator Paul Sarbanes, the Democrat who co-authored the Sarbanes-Oxley legislation, asked Mr Cox if the US Chamber of Commerce was wrong to greet his proposed appointment with the claim that the "pendulum is swinging back" in favour of business. Mr Cox said that it was wrong to suggest he would be "lax on enforcement" or not pursue "appropriate regulation".

Labels: Enron

Enron Task Force Director Andrew Weissmann To Step Down, Sean Berkowitz Named Director

July 20, 2005
I-Newswire.com

WASHINGTON, D.C. - Acting Assistant Attorney General John Richter of the Criminal Division announced today that Andrew Weissmann will step down as Director of the Justice Department’s specially-formed Enron Task Force, after more than three-and-a-half years on the prosecutorial team, including 17 months as director.

Labels: Andrew Weissmann, Enron

...[T]he motivation of these lead plaintiffs has always raised questions. In other forms of class-action lawsuits, notably those concerning civil rights, each member of the class stands to gain a similar, common benefit—for example, access to something that had previously been denied. In securities class-action suits, however, the gains are proportional to share ownership. Why, then, would small investors take on the burden of championing a suit?

...Conjecture centred on law firms because until the class-action rules were changed in 1995, they clearly had most to gain. Lead plaintiffs, regardless of the size of their investment, were allowed to play a central role in the selection of counsel and their compensation (which could be as much as 40% of any settlement). This is not true now, because one of the largest shareholders is typically the lead litigant...

...For many years it was suspected, but always denied, that a number of law firms maintained a network of individuals who would buy token amounts of stock in many companies. These people would then be able to sue at the first sign of trouble. Named plaintiffs were barred from sharing their lawyers' fees, because they would have an incentive to maximise rather than minimise them, says James Copland, director of the Centre for Legal Policy at the Manhattan Institute. That would subvert a primary aim of tort cases—making victims whole—because a plaintiff sharing in the lawyers' cut would, in effect, be gaining at the expense of his fellows in the class action. It would also provide incentives for spurious litigation that companies might feel forced to settle.

Silicon Valley execs who have grappled with Lerach are already feeling more than a little vindicated. Although government reforms stopped the practice in the early 90s, the ability of Milberg Weiss to find a willing plaintiff to sue within hours of an unexpected stock drop raised suspicions with companies for years.

Faced with Lerach's aggressive tactics and the skill of his staff of lawyers, companies often would settle, rather than incur years of legal fees fighting a Milberg Weiss suit. They complained bitterly that Lerach was preying on legitimate companies which happened to have volatile stocks -- often tech-related outfits.

Indeed, a judge removed the lead plaintiff from a Milberg suit against a tech firm called Terayon in 2004, questioning whether the plaintiff had helped drive down Terayon's stock by selling its stock short.

“We are saddened by the indictment today of Seymour Lazar, who has been a client of this firm. Many of [Mr] Lazar’s cases championed consumer rights, and resulted in many of the protections consumers enjoy today, including safeguards against discrimination by restaurant chains, prohibitions on unfair charges by rent-a-car companies, and penalties for misconduct by big corporations and their accountants."

Lerach won't comment on his current troubles, but people in his camp have been quick to cast the investigation as politically motivated, an example of a pro-business Republican administration going after a scourge of corporate wrongdoing - and a big contributor to the Democrats to boot. Besides, doesn't Lerach currently have a shareholder suit against Halliburton, one that even points the finger at its former chief executive, the vice president, Dick Cheney? Hasn't he extracted $4.7 billion so far for the beleaguered shareholders of Enron, the company once run by President George W. Bush's old friend, "Kenny Boy"? Lerach's lawyer, John Keker, said in a statement that "Bill Lerach has done more to protect shareholders than this SEC and the Department of Justice combined"- and made ominous references to Lerach's "powerful enemies."

Labels: Enron

Ex-Lawyer Is Indicted on Kickbacks in Lawsuits

By JOHN M. BRODER
June 25, 2005

LOS ANGELES, June 24 - A federal grand jury here has indicted a retired 78-year-old Palm Springs lawyer for allegedly receiving at least $2.4 million in kickbacks from one of the nation's most prominent plaintiffs' law firms.

The indictment charges that the defendant, Seymour M. Lazar, and members of his family served as plaintiffs in dozens of class action and shareholder lawsuits filed by the New York law firm of Milberg Weiss Bershad & Schulman, perhaps the country's most aggressive filer of lawsuits against corporations.

Milberg Weiss has won billions of dollars in claims on behalf of shareholders against corporations, including lawsuits filed on behalf of investors in Enron, Halliburton, Lucent Technologies, HealthSouth and Tyco. President Bush and many other Republicans consider the firm and others like it to be enemies of business who use courts to enrich themselves at the expense of consumers.

The indictment, handed up by a federal grand jury here on Thursday, charges Mr. Lazar with mail fraud, money laundering and conspiracy to obstruct justice, among other charges. Milberg Weiss is not a defendant in the indictment and is not named anywhere in it. It is referred to only as "the New York law firm" with whom Mr. Lazar did business. But a spokesman for Milberg Weiss confirmed that it was the law firm cited throughout the indictment...

...According to the indictment, Mr. Lazar, as a shareholder in the sued companies, would have been entitled to a prorated portion of any settlement won by Milberg Weiss. Instead, it said, the law firm illegally paid him part of its lawyers' fees, frequently funneled through a second defendant, Paul T. Selzer, 64, a lawyer in Palm Springs.

Mr. Lazar's lawyer, Thomas H. Bienert, said he believed that the government was trying to pressure his client to take a plea deal and testify against Milberg Weiss. "It appears this is an effort to get Mr. Lazar to say negative things about his class action counsel and become a government witness," Mr. Bienert said...

..."Milberg Weiss has cooperated with the government's investigation, which has continued for more than three years," it said. "Although the indictment does not name Milberg Weiss, it unfairly implicates the firm in the wrongdoing alleged against Lazar. We are outraged that the allegations have been made against the firm and reject them as baseless."

Labels: Enron, money laundering, Tyco

Labels: Enron, Grant Thornton, Parmalat

On Monday, the US District Court in New York sentenced the 80-year-old Rigas for conspiracy and fraud that eventually drove the nation’s fifth-largest cable provider to bankruptcy. His son and former Chief Financial Officer, Timothy Rigas, was sentenced to 20 years in prison for his role in the case. Judge Leonard Sand ordered both men to be surrendered to prison by September 19...

...In one of the harshest sentences for white-collar crime, prosecutors are sending a clear message to corporate executives that the US government is serious about maintaining the integrity of its financial markets. This case will likely mean a lifetime sentence for the elder Rigas, who, at 80 years of age, is suffering from bladder cancer.

Rigas’ attorneys had asked for leniency during the trial, citing philanthropy, to which Judge Leonard Sand replied, “To be a great philanthropist with other people's money really is not very persuasive.” However, John Rigas’ age was taken into consideration for this sentence, and his prison time may be cut short if his health continues to deteriorate.

"This is a tragedy lacking in heroes," the judge said. Adelphia prosecutors had accused the Rigases of using complicated cash-management systems to spread money around to various family-owned entities and as a cover for stealing about $100 million for themselves.

They were accused of spending the money on a lengthy list of personal luxuries. Prosecutors said John Rigas had ordered two Christmas trees flown to New York for his daughter at a cost of $6,000, ordered up 17 company cars and had the company buy 3,600 acres of timberland at a cost of $26 million to preserve the view outside his Pennsylvania home.

Worse still for investors, the company collapsed into bankruptcy in 2002 after it disclosed a staggering $2.3 billion in off-balance-sheet debt that prosecutors said was deliberately hid by the Rigases.

Labels: 2006, Dennis Kozlowski, Enron, Health South

TYCO INTERNATIONAL LTD. -- Former Chief Executive L. Dennis Kozlowski and Chief Financial Officer Mark H. Swartz were convicted Friday on 22 of 23 counts of grand larceny, conspiracy, securities fraud and falsifying business records. Prosecutors accused the two of conspiring to defraud Tyco of millions of dollars to fund extravagant lifestyles. The two executives each face up to 30 years in prison.

HEALTHSOUTH CORP. -- Former CEO Richard Scrushy could spend the rest of his life in prison if convicted on all 36 counts of conspiracy, false reporting, fraud and money laundering for allegedly orchestrating a $2.7 billion earnings overstatement at the rehabilitation and medical services chain for seven years beginning in 1996. A Birmingham, Ala., federal jury has been deliberating in the case since May 19.

WORLDCOM INC. -- Bernard Ebbers, former chief of the one-time telecom giant, was found guilty of fraud, conspiracy and making false regulatory filings in WorldCom's $11 billion accounting scandal. The case against him was largely based on the testimony of former CFO Scott Sullivan, who agreed to testify against his boss as part of a plea deal. Ebbers is due to be sentenced next month and faces up to 85 years in prison.

ENRON CORP. -- Enron founder Kenneth Lay, former CEO Jeffrey Skilling and former top accountant Richard Causey are scheduled to go to trial in January on federal fraud and conspiracy charges. Former CFO Andrew Fastow pleaded guilty in January 2004 to two counts of conspiracy, admitting to orchestrating schemes to hide the company's debt and inflate profits while pocketing millions of dollars. He agreed to serve the maximum 10-year sentence, which will begin in July 2006, after he testifies against his former bosses.

In addition, Fastow's wife will complete a year-long sentence next month on a misdemeanor tax charge for failing to report her husband's kickbacks. Former Enron treasurer Ben Glisan Jr. is serving a five-year sentence for his role in the scandal. And two former Merrill Lynch & Co. executives were sentenced to short prison terms for their roles in a bogus Enron sale of power barges.

ADELPHIA COMMUNICATIONS CORP. -- Founder John Rigas and his son Timothy were convicted in federal court last year of conspiracy, bank fraud and securities fraud. The two are to be sentenced Monday. Another Rigas son, Michael, was acquitted of conspiracy charges before the case ended in a mistrial with jurors deadlocked on 17 counts against him. A fourth executive, Michael Mulcahey, was found not guilty of conspiracy and securities fraud.

CREDIT SUISSE FIRST BOSTON -- The company's former investment banking star, Frank Quattrone, was convicted in May 2004 on federal charges of obstruction of justice, after his first trial ended in a hung jury. Quattrone, who made a fortune taking Internet companies public during the dot-com stock boom, was sentenced to 18 months in prison. He is free on bail and appealing the conviction.

MARTHA STEWART: The founder of the homemaking empire was released March 4 after serving five months in prison, and is serving an additional five months confined to her home. She was convicted in federal court last year of conspiracy, obstruction of justice and making false statements related to a personal sale of ImClone Systems Inc. stock. Her former broker at Merrill Lynch, Peter Bacanovic, began serving a five-month sentence in January, and still faces five months of home confinement. Stewart's conviction was not related to the company she founded, Martha Stewart Living Omnimedia Inc.

Labels: 2006, Andy Fastow, Dennis Kozlowski, Enron, Health South, money laundering, Tyco

Labels: Enron

In a two-and-a-half-year tenure Donaldson pushed through tough new rules for mutual funds, hedge funds and stock trading and pricing that set a high-water mark for the SEC's reform effort following the Enron scandal.

"I have been honored to serve as chairman," Donaldson said in a statement. "Although there will always be more work to be done to preserve and enhance the integrity and strength of our nation's corporations and markets, I believe the time has come for me to step down and return to the private sector and my family."

The 73-year-old former investment banker has led the SEC since early 2003, drawing criticism from both business lobbyists, who called him too heavy-handed, and investor activists, who called him too gentle.

Cox, 52, is chairman of the House Homeland Security Committee, and a veteran of the Financial Services Committee. The holder of a business and a law degree, he has voted for legislation to make it easier for companies to defend against securities fraud lawsuits.

Cox supported the Sarbanes-Oxley Act of 2002, Congress' response to financial scandals at Enron Corp., WorldCom Inc. and other large companies. The law ordered the most far-reaching changes in corporate accountability since the Depression, imposing stiff new rules on companies and their top executives. He also is a longtime advocate of repealing taxes on capital gains as well as on dividends.

Labels: Enron

Labels: Enron

"Dynegy engaged in some of the same types of off-balance-sheet transactions that Enron did, and when the whole thing got exposed, its stock plummeted," said William S. Lerach, lead attorney for the shareholders. "They engaged in secret transactions to artificially boost cash flow."

Labels: Enron

Wall Street Needs A New Cop

Liz Moyer
04.14.05

NEW YORK - As Stephen Cutler prepares to step down as the top cop at the U.S. Securities and Exchange Commission, he leaves behind an intensifying investigation into the insurance industry but a sense that an era of corporate scandal is winding down.

Cutler said today he would leave in the next month after three and a half years as director of the SEC's enforcement division, which acts as the watchdog of Wall Street. It has been among the most tumultuous periods in corporate America. As director, he levied more than $6 billion in penalties and disgorgement, targeting Enron, Adelphia Communications (otc: ADELQ - news - people ), Qwest Communications (nyse: Q - news - people ), Tyco International (nyse: TYC - news - people ), WorldCom (nasdaq: MCIP - news - people ), Time Warner (nyse: TWX - news - people ) and others.

Earlier this week, Cutler finalized a multiyear investigation into trading practices by specialists on the New York Stock Exchange, bringing civil charges against 20 individuals and scolding the NYSE for failing to police those traders, who are supposed to make efficient markets in listed stocks.

Already today, there was speculation that Linda Thomsen, a highly regarded longtime SEC prosecutor and Cutler's deputy, would be named interim enforcement director, if not his outright successor. An SEC spokesman declined to comment.

Naming Thomsen would "send a powerful signal that the chairman wants continuity," says Joel Seligman, a professor of corporate law at Washington University's School of Law. "It would be seen as disquieting to bring someone in from the outside."

Cutler joined the agency as deputy director of enforcement in 1999. Before that, he was a partner in the Washington firm Wilmer, Cutler & Pickering. He has not said where he is headed, though the announcement said he planned to return to private practice.

Just weeks after he became director in 2001, Enron, a Houston energy firm that was once the seventh-largest U.S. company, collapsed into bankruptcy amid allegations of massive accounting fraud.

Cutler worked often in tandem with New York State Attorney General Eliot Spitzer. Two years ago this week, the SEC and Spitzer announced a $1.4 billion settlement with ten Wall Street firms, including Citigroup (nyse: C - news - people ), Merrill Lynch (nyse: MER - news - people ) and Morgan Stanley (nyse: MWD - news - people ), and ordered them to put better controls on avoiding conflicts of interest between bankers and research analysts.

"It's been one of the most amazing times in the agency's history," says Charles Elson, a professor and corporate governance expert at the University of Delaware.

An investigation into transactions and accounting at American International Group (nyse: AIG - news - people ) is just under way, but observers said they didn't believe Cutler's departure from the SEC would interrupt that probe.

Cutler's departure "is certainly not sending us a signal that we can discern anything with regards to the AIG case," says Roy Smith, a professor at New York University's Stern School of Business.

A steady stream of earnings restatements in the last year will ensure that there is plenty of work for the SEC's enforcement division, but even Cutler suggested a lot of the heavy lifting is over.

In a speech last month, he said, "I do believe our enforcement approach is about where it needs to be--and is producing real results... I don't think we'll be seeing an enforcement docket three to five years from now that looks anything like the enforcement docket we have today."

Labels: AIG, Eliot Spitzer, Enron, Morgan Stanley, New York AG, Tyco

Labels: Enron, money laundering

Labels: Enron, FOIA

SEC Chairman Faults Corporate Advisers Lawyers, Auditors Reminded Of Duty

WashingtonPost.com. March 5, 2005
by Carrie Johnson

EXCERPT: Securities and Exchange Commission Chairman William H. Donaldson said yesterday that he was disappointed with lawyers and other corporate advisers who failed to blow the whistle on recent financial abuses, engaged in "rhetorical somersaults" and "lost sight of their basic ethical responsibilities." Donaldson, speaking to a Washington audience of more than 1,000 securities lawyers, said lawyers and auditors are crucial gatekeepers for the integrity of the markets. Lapses over the past few years by outside advisers directly contributed to financial frauds that devastated thousands of investors, he said. "I hope you will not expend significant time, money and energy devising structures aimed at evading requirements and trying to achieve an accounting or disclosure result that . . . artfully dodges the rule's purpose," Donaldson said. The SEC has lodged 76 cases against lawyers in the past 3 1/2 years, chief litigation counsel David L. Kornblau said in a separate Practising Law Institute session yesterday. Kornblau said 18 cases have been filed already this fiscal year. "These lawyers did not seem to have in their vocabulary the word 'no,' " Kornblau said. The conduct of auditors at accounting firms of all sizes also remains on the SEC's radar screen. Agency officials said they will continue to scrutinize auditors' relationships with their clients for possible violations of independence rules. They said they expect more enforcement actions to come in cases where auditors have grown too cozy with their clients to render impartial reviews of financial reports. Separately, SEC chief accountant Donald T. Nicolaisen laid out several of his priorities for 2005. Donaldson said his office soon would release a report about corporate use of off-balance-sheet entities such as those that hid billions of dollars of Enron Corp. debt.

Labels: Enron, Standford Securities Class Action Clearing House