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The
Corporate Reform Weekly
Vol.
5 #17 April 24, 2006
In
Short
Scandal
1. Freddie Mac pays two big
settlements
2. Skilling testimony concludes in
Enron trial
3. Tyco pays $50 million to settle
with SEC
4. JP Morgan pays $425 million to
settle class-action suit on IPOs
Securities
and Exchange Commission
5.
SEC panel recommends exempting 80 percent of companies from Sarbanes-Oxley
This
Week’s Action Item
Tell
your Representative you want an independent Office of Public Integrity as part
of lobbying and ethics reform
Scandal
1.
Freddie Mac pays two big settlements
Freddie Mac
last week paid two major settlements – a $3.8 million fine to settle charges
that it violated election law by giving $1.7 million in corporate money at
political fundraisers, and $410 million to shareholders to settle claims of
accounting fraud that led the company to restate earnings by $5 billion between
2000 and 2002.
The $3.8
million elections violation fine marks the largest fine ever levied by the
Federal Elections Commission (FEC). The allegations are that Freddie Mac
violated laws that prohibit companies from donating directly to candidates or
using corporate money for fundraising and instead spent $1.7 million at
political fundraisers for more than 50 politicians who were on committees
tasked with overseeing the government-chartered company.
The largest
recipient of Freddie Mac money was Michael G. Oxley (R-Ohio), chairman of the
House Financial Services Committee, which oversees Freddie Mac. In an
internal document, former company lobbyist Mitchell Delk wrote: "90
percent of events were hosted by M. Delk to benefit Chairman Oxley."
Freddie Mac
also contributed $150,000 to the Republican Governors Association in 2002, also
in violation of election law.
According to
the FEC investigation, the company also illegally hired consultants to arrange
fundraising events and pass checks from its executives to members of Congress.
Freddie Mac’s
other settlement was with private shareholders, who had claimed that the
company had deceived them with illegal accounting. Freddie Mac paid out $410
million, which is significant, but pales in comparison to Enron’s $7.2 billion
pay-out to defrauded investors and WorldCom’s $6.2 billion pay-out to defrauded
investors.
“We have sent
an important message to companies who receive money from investors: We will
protect our citizens' savings with tenacity," Ohio Attorney General Jim
Petro, who represented the lead plaintiffs in the case, the Ohio Public
Employees Retirement System and State Teachers Retirement System of Ohio, told
reporters.
For more, see:
“Freddie Settles Investor Lawsuits,” By Kathleen Day and Annys Shin, Washington
Post: http://www.washingtonpost.com/wp-dyn/content/article/2006/04/18/AR2006041800987.html
“Mortgage Firm
to Pay $3.8 Million Over Fundraising Allegations,” By Kathleen Day and Annys
Shin, Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2006/04/18/AR2006041800987.html
2.
Skilling testimony concludes in Enron trial
Former
Enron CEO Jeffrey Skilling last concluded his testimony in his and Enron
founder Ken Lay’s trial, doing his best to fend off allegations by prosecutors
that he knew full well that Enron was a financial house of cards built on
fraud, and yet continued to publicly say that Enron was fine and poised to do
even better.
When
pressed by government prosecutors, Skilling said he was unable to remember
certain meetings, and that he was out of town for others. In some cases, his
descriptions of meetings and events were quite different from those of prosecution
witnesses.
Some
highlights from prosecutor Sean Berkowitz’s cross-examination of Skilling:
Berkowitz
grilled Skilling on whether or not he had pressured Enron accountants to
manipulate quarterly earnings. Prosecution witnesses have said that Enron
pulled money from its reserves in 1999 and 2000 to cover earnings
shortfall.
As for the
1999 change, Skilling said: "I have no recollection of that at all,"
Skilling testified Tuesday. "I'm not sure that really happened."
As for
the 2000 change, when Enron pulled $14 million from reserves to kick quarterly
earnings from 32 cents to 34 cents a share, Skilling testified that he was on
vacation in Africa, heard the quarter was “coming in hot,” and told Enron’s
CFO, Richard A. Causey to “shoot for 34.”
Skilling said
that the reserves "are not typically locked until right before the end of
the quarter."
"Did I
ever give anyone any instruction to change the results of the quarter?”
Skilling said. “I did not."
Skilling said
that he had no idea that his company was having trouble meeting analyst earning
targets, contrary to what government witnesses had testified to. He defended
his aggressive pushing for earnings targets as normal aggressive business.
"I would
hope we were pushing, because if you're not pushing, you're not doing the best
job for your shareholders," Skilling told jurors. "Was there any
question during that time period where I thought there would be a shortfall?
No. Go ahead, show me some [documents] because I don't think that's true."
On another
occasion, Berkowitz confronted Skilling over charges that he didn’t tell
investors about how most of the company’s profits were coming from risky gas
and electricity trades. Former employees testified that the Skilling had
privately expressed fears that if investors really understood the gas and
electricity trading business they would have punished the company’s stock
price.
“Mr.
Berkowitz, we published exactly the statistics the market would need,''
Skilling responded. ``They absolutely had those numbers. Our stockholders and
our owners knew exactly what they needed to know.''
``You're
trying to suggest that somehow this is misrepresented,'' Skilling added. ``I
don't know how you can misrepresent the specific statistics.''
In another
instance, Berkowitz reminded Skilling of a time in June 2001, at the height of
the California energy crisis, when he publicly joked that the only difference
between the Titanic and California was that "at least the lights were on
when the Titanic went down."
Berkowitz
asked: "Do you think that's funny? You were smiling. What happened out
there, do you think that's funny?" Skilling finally conceded that he
regretted the joke.
Ultimately,
the decision of the jury may depend on how convincing Skilling was, whether or
not he managed to convince the jury that we was the victim of an overbearing
government prosecution or not.
See:
“Skilling's
Temper Is Tested in Day 2 Under Fire,” http://www.nytimes.com/2006/04/19/business/19enron.html
“Skilling's
Temper Drawn Out on Stand,” By Carrie Johnson, Washington Post Staff Writer: http://www.washingtonpost.com/wp-dyn/content/article/2006/04/18/AR2006041800680.html
“Enron's
Skilling Denies Lying to Investors Over Energy Profits,” by Bloomberg News: http://www.bloomberg.com/apps/news?pid=10000087&sid=affVCy_1gKII&refer=top_world_news
“Enron's
Skilling Denies Tailoring Testimony at Trial,” by Kristen Hays, Associated
Press: http://cnn.netscape.cnn.com/news/story.jsp?floc=ne-us-9-l6&idq=/ff/story/0001%2F20060417%2F1926369652.htm&sc=1333
3. Tyco pays $50 million to
settle with SEC
Tyco has
agreed to pay $50 million to end a Securities and Exchange Commission
investigation into allegations that the company inflated its earnings by more
than $1 billion under former CEO Dennis Kozlowski between 1996 and 2002.
Kozlowski and
former CFO Mark Swartz are now serving up to 25 years in prison for stealing
more than $150 million from the company and defrauding company shareholders.
``There
are few if any cases that can match the greed and deception that existed at
Tyco,'' SEC enforcement official Scott Fries told reporters. ``For many people,
the Kozlowski era at Tyco became synonymous with executive corruption.''
Tyco
still faces shareholder suits that could ultimately cost the company as much as
$4 billion.
For more,
see: “Tyco, SEC Reach $50 Mln Accounting-Probe Settlement”: http://quote.bloomberg.com/apps/news?pid=10000006&sid=apYwLgCZBQQc&refer=home
4.
JP Morgan pays $425 million to settle class-action suit on IPOs
JP Morgan
Chase last week agreed to ay $425 million to settle claims that it cheated
ordinary investors out of hundreds of millions of dollars by giving hot initial
public offerings (IPOs) to favored clients in exchange for lucrative banking
deals. The class-action lawsuit also claimed that the banks and the favored
clients conspired to drive up IPO share prices artificially through promises to
buy and sell at certain prices.
"We
are out to prove the tech bubble wasn't irrational exuberance, but the product
of manipulative Wall Street firms," Lead attorney Melvyn Weiss told
reporters.
JP Morgan
Chase is the first of 55 investment banks named as defendants to settle. Morgan
Stanley, Credit Suisse, and Goldman Sachs have also been named. Weiss said that
when it came to settlements with other banks, “We are not close.” The class
action suits also name 300 companies that participated as favored
clients.
In the last
few years, big banks have already paid millions of dollars to settle related
allegations of wrongdoing. In April 2003, 10 top Wall Street banks paid $1.4
billion to settle charges brought by regulators that the banks misled investors
by issuing stock reports designed more to win banking business than help
ordinary investors. In January 2002, Credit Suisse paid $100 million to settle
SEC charges that it got inflated commissions for connected favored investors
with hot initial public offerings.
The class
action was not the first time allegations of misbehavior had surfaced
concerning initial offerings. A number of the banks named have settled similar
allegations with the S.E.C. Credit Suisse, whose technology franchise won it a
coveted lead role in many of the hottest initial offerings, paid $100 million
in January 2002 to settle charges that it received kickbacks from investors, in
the form of inflated commissions, in exchange for doling out shares in initial
offerings.
“First Bank to
Settle I.P.O. Suit,” By ERIC DASH and JENNY ANDERSON: http://www.nytimes.com/2006/04/21/business/21ipo.html?ex=1303272000&en=0e27f15f6124af00&ei=5088&partner=rssnyt&emc=rss
Securities
and Exchange Commission
5.
SEC panel recommends exempting 80 percent of companies from Sarbanes-Oxley
An advisory
panel to the Securities and Exchange Commission has recommended that 80 percent
of US public companies should be exempt from the internal audit requirements of
Sarbanes-Oxley, leaving only the largest public companies to comply.
Such a recommendation
is heavily favored by a broad range of business lobbyists, who have argued that
the costs of compliance are too high for many companies. But it remains unclear
whether the SEC will act on the advice.
According to
reports, four out of five SEC Commissioners, including chairman Christopher
Cox, say they oppose the idea of an exemption. What they do favor is an
across-the-board reduction of audit requirements.
Senator Paul
Sarbanes (D-Md), for whom Sarbanes-Oxley is named, argued against the exemptions
and suggested that the advisory committee was captured by industry and does not
properly have the concerns of investors in mind.
"Regrettably,
its membership was not as balanced as one would have wished, and that committee
has now made a number of sweeping recommendations, including one that would
effectively exempt four out of every five companies from the requirements of
Section 404," Mr. Sarbanes told the Consumer Federation of America in a
recent speech.
Damon A.
Silvers, an associate general counsel at the A.F.L.-C.I.O., also has said the
recommendations were "the product of a committee whose composition isn't
consistent with the SEC's focus on protecting investors."
All this may
come to a head at a May 10 public SEC meeting on the costs of Sarbanes-Oxley
compliance.
For more, see:
“S.E.C. Panel to Urge Auditing Exceptions,” By STEPHEN LABATON of the New York
Times: http://www.nytimes.com/2006/04/19/business/19secure.html
This
Week’s Action Item
Tell
your Representative you want an independent Office of Public Integrity as part
of lobbying and ethics reform
This Thursday,
the House of Representatives is about to take up lobbying reform.
Unfortunately, the bill that will likely be voted on is essentially a sham.
The following
summary comes from Common Cause:
“Against the
backdrop of one of the most serious congressional ethics scandals in history,
the House of Representatives is poised on April 27 to pass a so-called ethics
and lobby reform bill that not only fails to meaningfully address the
still-unraveling scandal, but seems to disguise ways of maintaining the status
quo.”
“For example,
one provision in the bill would temporarily ban privately funded travel for
Members of Congress, an area that has been rife with abuse. Guess when
the ban expires? December. That way, Members at home campaigning get to
tell constituents that they supported travel "reform," but as soon as
Congress is back in session, it's business as usual.”
“Another
provision would prohibit lobbyists from flying on private corporate jets with
Members of Congress, because of outrage over the privileged access these
lobbyists now enjoy on the flights. This reform misses the problem
completely. First, prohibiting registered lobbyists from these flights
simply means that another representative from the trip sponsor will sit in the
lobbyist's seat and likely make the same pitch to the member of Congress.
“Second, and
more importantly, the Members who fly on private charter jets sponsored by
corporations or unions will continue to receive a huge discount from only
having to pay the first class fare for the ticket, and not the full cost of
chartering the plane. Travel on corporate jets is a problem because it
allows lobbyists to give Members a valuable and enticing gift - a flight on a
corporate jet - which costs far above the $50 gift limit. Simply
prohibiting lobbyists on these flights only partially deals with the issue of
access and completely misses the problem of the end-run around gift
rules. If Members of Congress fly on a chartered plane, then they should
have to pay for the cost of chartering the plane, just like the rest of us.”
“The
bill also has two serious loopholes with respect to new disclosure requirements
for lobbyists who fundraise for Members of Congress. Since the scandal
around lobbyist Jack Abramoff demonstrated the influence of contributions from
lobbyists and their clients, this bill proposes that lobbyists disclose the
campaign contributions and money spent organizing fundraisers for Members of
Congress.”
‘ The lobby
reform bill in the House, however, so narrowly defines what qualifies as a
fundraising event for a member of Congress that it will be easy to design
campaign fundraisers that do not meet the definition, and therefore will not
have to be disclosed. It also only applies to fundraisers hosted "to
honor" a Member of Congress. If an invitation uses other wording,
the organizers would not be required to disclose. In addition to weak
proposals and loopholes in the bill, there are a number of reforms not addressed
at all. For example, the bill includes no mechanism for enforcing and
monitoring old and new rules. The House Ethics Committee and the process
for enforcing House ethics rules have been in complete shambles for well over a
year and have no public credibility. The Ethics Committee has been
inoperative for essentially all of this Congress and shows no signs of
addressing numerous matters that have been and are before the Committee.”
However,
there is some hope.
Again, from
Common Cause:
“Representatives
Christopher Shays (R-CT) and Marty Meehan (D-MA) have proposed an amendment to
H.R. 4975 to establish an independent Office of Public Integrity to work with
the Ethics Committee and assist in enforcing the House ethics rules. The
Republican leadership of the House is also reportedly contemplating breaking
the bill into several pieces and moving them separately, and in some cases
prohibiting any amendments from being considered. It is essential that
members of the House be given the opportunity to vote on this uniquely
important amendment. In addition, Members must be given the opportunity
to vote on a number of other important amendments on the floor, including one
requiring the disclosure of huge sums lobbying firms are secretly spending on
campaigns to stimulate lobbying of Congress by the public, including
multimillion dollar advertising campaigns. Although there has been much
outrage expressed over the excesses of the Abramoff scandal, this lobby reform
legislation does not require the disclosure of grassroots lobbying - which was
at the heart of Abramoff strategy to defraud Indian tribes.”
As This Week’s
Action Item, please call your Representative and ask them to support the
Shays-Meehan amendment to create an independent Office of Public Integrity to
work with the Ethics Committee and assist in enforcing the House ethics rules
For the full
Common Cause summary:
Help
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Bolstered with
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appeal both to deeply-committed long-time activists looking for a coherent
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