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The
Corporate Reform Weekly
Vol. V
#22 May 30, 2006
In
Short
Corporate
Scandal
1. Skilling, Lay
convicted of fraud, conspiracy
2. Report says Fannie
Mae engaged in “extensive financial fraud”
3. Allegations of
stock-options backdating grow
Washington
Corruption
4. FBI catches Rep.
Jefferson taking bribes, stirs constitutional controversy
5. Safavian trial gets
underway
This Week’s
Action Item:
Keep Pushing for Clean
Elections
Corporate
Scandal
1.
Skilling, Lay convicted of fraud, conspiracy
Almost four and a half
years after Enron declared bankruptcy, a Houston jury of eight women and four
men reached a consensus last Thursday. They concluded that Enron founder
Kenneth L. Lay and former CEO Jeffrey K. Skilling were indeed guilty of fraud
and conspiracy in the larger-than-life accounting hustle that cost thousands of
workers their jobs and drained $60 billion in shareholder value. Lay was
convicted on all six counts and Skilling was convicted on 19 of 28 counts.
The trial took 51
witnesses, 56 days of testimony over 16 weeks, 27 boxes of evidence, and five
days of deliberations. In the years leading up to it, federal prosecutors spent
endless hours and countless millions securing the guilty pleas of 16 former Enron
employees. Some of these employees’ testimonies were the key to convincing
jurors that Lay and Skilling were, in fact, aware of Enron’s curiouser and
curiouser approach to financial accounting, despite the defendants’ blithe
public proclamations and later courtroom claims to the contrary.
Both Skilling and Lay
testified in their own defense, arguing essentially that Enron’s collapse was
more of a classic run on the bank caused by a panicky investment climate than a
deliberate fraud. They blamed CFO Andrew Fastow for any fraud that might have
occurred, but insisted that they were focused on the big picture and certainly
didn’t direct or know about any fraud until much later.
Skilling testified that
he never signed paperwork approving Fastow’s deals and he was more focused on
building new businesses. Lay said that he was “very much of a decentralized
person” and a “delegator,” who didn’t even have time to read his e-mails and
relied on others to do so.
But jurors said
afterwards that they simply didn’t find that testimony compelling. "Both
defendants said they had their hands firmly on the wheel," juror Freddy
Delgado, an elementary school principal, told the media. "To say you
didn't know what was going on in your company . . . was not the right thing to
do."
"The jury has
spoken, and they have sent a powerful message," Justice Department Task
Force Director Sean M. Berkowitz told reporters. "You can't lie to
shareholders. You can't put yourself above employees' interests. . . . No
matter how rich you are, you have to play by the rules just like anyone
else."
Skilling and Lay could
face decades in prison when they are sentenced in September. The two, who have
already reportedly spent $70 million on their defense, are both appealing.
“We have just begun to
fight," Skilling’s attorney, Daniel Petrocelli told the media following
the trial. Promising “a full and vigorous appeal,” he announced that,
"We're going to take a look at everything. I know there are a number of
issues we litigated hard and lost even before the trial."
Legal experts quoted in
the media generally give Lay and Skilling a poor shot at successfully appealing
the conviction.
Lay was also convicted
of four counts of bank fraud and making false statement in a separate trial
conducted following the main trial related to personal loans.
For more,
see: “Enron Leaders Found Guilty,”
By Carrie
Johnson
Washington Post Staff Writer: http://www.washingtonpost.com/wp-dyn/content/article/2006/05/25/AR2006052500374.html
“Tough Justice for
Executives in Enron Era,” By KURT
EICHENWALD and ALEXEI
BARRIONUEVO http://www.nytimes.com/2006/05/27/business/businessspecial3/27enron.html
“Guilty Verdict for
Enron bosses,” Business Week http://www.businessweek.com/investor/content/may2006/pi20060525_754989.htm
“Guilty but not
over,” Daniel Fischer, Forbes, http://www.forbes.com/home/energy/2007/05/22/guilty-lay-skilling-cz_df_0525enronguilty.html
Harvey Pitt dissects the
Enron verdict; http://www.forbes.com/home/ceonetwork/2006/05/25/qna-pitt-enron-cx_hc_0525dissectingtheverdict.html
2.
Report says Fannie Mae engaged in “extensive financial fraud”
A new report on
mortgage lender Fannie Mae’s accounting describes “extensive financial fraud.”
According to the report, prepared by the Office of Federal Housing Enterprise
Oversight (OFHEO) after a 16-month investigation, the company spent six years
falsifying earnings numbers so that top executives could meet earnings targets,
collecting $25 million in bonuses. The total value of the fraud was $10.6
billion.
Following the
report’s release, Fannie Mae agreed to pay $400 million in penalties, but did
not admit or deny guilt. Now investigators will move on to more closely
documenting the specific roles that current and former and current executives
played in the fraud.
The report describes a
board of directors that was asleep at the wheel while CEO Franklin Raines and
CFO J. Timothy Howard manipulated earnings so that they could get the maximum
payouts. Raines earned $90 million in compensation between 1998 and 2003. The
report said he created an “unethical and arrogant culture” at the top of
company.
The report also
notes two transactions with Goldman Sachs Group that allowed the company to
push $107 million of earnings into future years to smooth earnings targets.
As part of the
settlement, Fannie Mae will have to review the conduct of its executives.
Current CEO Daniel H. Mudd and current Chairman Stephen B. Ashley were on the
board of directors during the entire six years of fraud. The company must also
consider retroactively firing Raines and Howard, cutting them off from millions
of dollars in severance compensation.
This latest report
follows up a separate report released in February, which concluded that Raines
and Howard “contributed to a culture that improperly stressed stable earnings
growth," and that the management team Raines hired was "inadequate
and in some respects was not competent."
According to that
report, overseen by former Sen. Warren Rudman:
-Management's accounting
practices in nearly all the areas reviewed did not adhere to generally accepted
accounting principles, and in many instances, management was aware that the
practices didn't comply.
-Fannie Mae in 1998
improperly put off accounting for $200 million in expenses to future periods so
that top executives could collect $27 million in bonuses. That was the only
instance found in which the violation of accounting rules appeared to be
motivated by a desire to maximize bonuses.
-Employees in critical
accounting, financial reporting and auditing positions were either unqualified,
did not understand their roles or failed to carry them out properly.
-Management tightly
controlled the flow of accounting and financial information to Fannie Mae's
board, and provided incomplete and sometimes misleading information. Former
chief financial officer Timothy Howard, in particular, filtered the information
that the board received.
-The company's
accounting systems were "grossly inadequate."
For more, see:
“Fannie Mae manipulated
accounting,” Associated Press:
http://www.businessweek.com/ap/financialnews/D8HPOVJO0.htm?campaign_id=apn_home_down&chan=db
“A Fannie Mae Settlement
Is Reported,”
By ERIC DASH and STEPHEN
LABATON of the New York Times: http://www.nytimes.com/2006/05/23/business/23fannie.html
Fork it over, Fannie
Mae, LA Times editorial: http://www.latimes.com/news/opinion/editorials/la-ed-fannie27may27,0,3976209.story?coll=la-news-comment-editorials
“Are Enrons Bustin'
Out All Over,” by GRETCHEN MORGENSON New York Times Select: http://select.nytimes.com/2006/05/28/business/yourmoney/28gret.html
3.
Allegations of stock-options backdating grow
A year after FASB
finally mandated that companies list stock options as an expense, the
Securities Exchange Commission and New York Attorney General Eliot Spitzer are
reportedly now investigating potential illegal stock-options grant backdating
at at least 22 corporations.
Backdating the grants
benefits executives, because the earlier the grant date, the lower the stock
price at the grant date. When executives sell their options, they get the
difference between the current price and the grant date price, so they stand to
benefit if options are backdated.
Last week,
anti-virus software maker McAfee announced that it was in informal talks with
the SEC about backdating and was conducting an internal investigation.
Other companies
reportedly under investigation for illegal activity include: Caremark Rx Inc.,
SafeNet Inc., Vitesse Semiconductor Corp., Affiliated Computer Services Inc.,
UnitedHealth Group Inc., Nyfix Inc., Comverse Technology Inc., American Tower
Corp., Brooks Automation Inc., Jabil Circuit Co., RSA Security Inc., Mercury
Interactive Corp., KLA-Tencor Corp.
In response, the
California Public Employees’ Retirement System (CalPERS) is asking companies
whose stock options granting practices are under investigation for more data on
how the companies are setting finance and executive pay.
For more, see:
“U.S. Probe Into Options Widens to Rival Fund Scandal ,” by Bloomberg News: http://www.bloomberg.com/apps/news?pid=10000103&sid=a8KOBhPR_zGE&refer=us
“SEC looking at
options backdating by McAfee,” San Jose Mercury News
http://www.mercurynews.com/mld/mercurynews/business/14672761.htm
Washington
Corruption
4. FBI
catches Rep. Jefferson taking bribes, stirs constitutional controversy
The FBI last week
released an affidavit describing widespread corruption the agency found in an
investigation of Rep. William Jefferson (D-La.).
The FBI recorded
conversations and meetings that Jefferson had with an investor in iGate, a
technology company that Jefferson allegedly used his influence to help gain
business in Africa in exchange for bribes. The FBI tracked Jefferson accepting
$100,000 in marked bills from that investor, money Jefferson said he would use
to bribe African officials. An FBI raid four days later found $90,000 of
that cash in Jefferson’s freezer, wrapped in foil inside plastic food
containers.
Court documents
also describe videotape evidence of Jefferson passing back slips of paper back
and forth at a hotel, demanding more money and describing himself as a man
"in the shadows, behind the curtain," the affidavit said. On
videotape, Jefferson reportedly talks of money being funneled to a bank account
in his children names and then says, "All these damn notes we're writing
to each other as if we're talking, as if the FBI is watching.”
Vernon Jackson,
chief of iGate Inc., has already pleaded guilty and admitted to paying hundreds
of thousands of dollars to bribe Jefferson and his family members so that
Jefferson could use his influence to help secure contracts in Africa.
Reportedly, the FBI
is also looking at "at least seven other" bribery schemes in which
Jefferson "sought things of value in return for his performance of
official acts." Reportedly, there are a number of companies listed under
the names of Jefferson, his wife, or other relatives.
But Jefferson has
remained defiant in his innocence, and he has refused to step down from his
position on the House and Ways and Means Committee.
Meanwhile, House
members of both parties seem largely unified in their belief that the FBI’s
aggressive investigation tactics are an unconstitutional overreach that
violates the separation of powers between the executive and legislative
branches.
In response,
President Bush sealed the seized materials for 45 days, and Attorney General
Alberto Gonzales and FBI director Robert S. Mueller III both said that they
would resign if they were forced to return the seized evidence. Senate Majority
Leader Bill Frist (R-Tenn.) has also come out publicly in support of the raids.
According to a
report in the Los Angeles Times, the Justice Department has grown much more
aggressive in prosecuting public corruption, with more than 600 agents working
on 2,000 investigations at federal, state, and local levels.
According to the
Times:
“The Justice
Department also seems to be departing from past practice by giving largely
unfettered power to investigate such cases to U.S. attorneys across the
country. The result, some current and former officials said, is a sort of
feeding frenzy of new cases — the strength of which is far from clear.”
"A lot of
offices are smelling blood in the water," said a government official who
requested anonymity because of the sensitive nature of the investigations.
"Whether anything comes out of these things … is another question."
For more, see:
“Jefferson Probe
Includes Other Suspected Schemes: FBI Is Said to Be Looking for a Pattern,” By Allan Lengel,
Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2006/05/27/AR2006052700960.html
“For Congress, the
line that separates illegal conduct from business as usual may be shifting,” By
Richard B. Schmitt, Los Angeles Times: http://www.latimes.com/news/nationworld/nation/la-na-probes27may27,0,1574419,full.story?coll=la-home-headlines
“Attorney General
prepared to quit over Jefferson probe,” http://today.reuters.com/news/newsArticle.aspx?type=politicsNews&storyID=2006-05-27T061137Z_01_N26285010_RTRUKOC_0_US-CRIME-JEFFERSON.xml
5.
Safavian trial gets underway
The trial of David H.
Safavian, the former General Services Administration chief of staff charged
with repeatedly lying to investigators looking into the doings of his friend
Jack Abramoff, got underway last week. Safavian, who went to Scotland on a 2002
golf trip sponsored by Abramoff, initially told prosecutors that Abramoff had
no business before the GSA.
The Safavian trial is
the first or what are likely to be several surrounding the allegedly corrupt
activities of lobbyist Abramoff.
Last week, prosecutors
presented jurors with e-mails that showed Safavian offering advice on how
Abramoff could get government properties he was seeking to acquire in between
accepting invitations to play golf or to enjoy local sporting events from
Abramoff’s box seats.
As the White House’s
chief procurement officer, Safavian was in charge of the purchasing and leasing
of government property, and Abramoff was allegedly looking to buy some government
properties, one of which wanted to use for a luxury hotel, working with his
tribal clients on the deal.
"Will we get
an advantage if the tribe is a partner in the structure? How big a share should
they have?" Abramoff wrote in an e-mail. Safavian responded: "The
answer to your question is having the tribe involved will help
significantly."
In opening
arguments, prosecutor Peter Zeidenberg told a jury that "The defendant
lied, concealed and misled" federal investigators. He promised to show
"examples of concrete assistance" Safavian offered and to prove that
Safavian was also in the know regarding Abramoff’s interactions with Senate
staffers.
Safavian’s lawyer,
Barbara Van Gelder, argued that Safavian was misled by Abramoff, and besides,
Abramoff didn’t have any formal business with the GSA, and besides, "This
evidence is mostly paper.”
For more, see: “Safavian
Jury Is Shown More Abramoff E-Mail,”
By Susan Schmidt,
Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2006/05/26/AR2006052601856.html
“Safavian Lied About
Dealings With Abramoff, Prosecutor Says,”
By Jeffrey H. Birnbaum: http://www.washingtonpost.com/wp-dyn/content/article/2006/05/24/AR2006052400349.html
This
Week’s Action Item:
Keep
Pushing for Clean Elections
With public
corruption continuing to dominate the headlines, we need to keep pushing for
the most important reform – clean elections. It’s time to end the ridiculous
policy whereby candidates continually have to pander to special interests and
lobbyists in order to have the money they need to run a competitive campaign.
Already seven
states and two cities have passed Clean Election campaign reform. But if we’re
going to clean up Washington, we need for Congress to pass such a reform. Let’s
keep the pressure on.
As this week’s Action
Item, please either contact your members of Congress directly about the
importance of Clean Elections, or at least sign Public Campaign’s petition
demanding clean elections at: http://ga3.org/campaign/CleanElectionsA
Help
spread the word about The People's Business
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