Sarbanes-Oxley Act Passes First Court Test
The Associated Press, December 2, 2004
A federal judge has rejected a challenge by fired HealthSouth CEO Richard Scrusy to the new corporate fraud law aimed at top executives, which was adopted after a series of major accounting scandals. Under the Sarbanes-Oxley Act, a public company’s top executives are required to vouch for the company’s financial reports. Scrushy last year became the first CEO charged under Sarbanes-Oxley. Free on a $10 million bond, he is accused of heading a scheme to overstate earnings by $2.7 billion of rehabilitation hospitals and clinics. His attorneys claim the new law uses phrases like “willfully certifies” and “fairly represents” that make it all but impossible for corporate officers to tell if they are following the law.
Originally indicted last year on charges of fraud, conspiracy and violating the Sarbanes-Oxley Act, Scrushy was named in September in a new indictment that added perjury and obstruction-of-justice charges.
U.S. Judge Karen Bowdre rebuffed Scrushy’s argument that the law is unconstitutionally vague and should not be part of the indictment accusing him of massive fraud at HealthSouth. Bowfre said jurors, and not the judge, should decide key questions of Scrushy’s case. Jury selection is to begin Jan. 5, and is predicted to last several months.
Comment: While Sarbanes-Oxley appears to be a small part of Scrushy’s problem, he has the opportunity to make history with the first case.
Drivers Trade Loss of Privacy for Discount on Insurance
The Associated Press, September 3, 2004
For two months, Jacob Sevlie’s insurance company tagged along whenever he slid behind the wheel of his Honda Accord. An electronic monitor the size of a matchbook closely tracked Sevlie’s driving time and behavior. If he had a heavy foot or was a sudden braker, the auto data recorder would betray him.
Disconnected from the car and hooked to a PC, the device relayed Sevlie’s digital driving diary to his auto insurer, Progressive Casualty Insurance Company, during a pilot program earlier this year. Although privacy advocates say the gadget smacks of Big Brother, Sevlie signed up and sent monthly data in hopes of saving money on his insurance. In return, he got a $25 stipend and the promise of a 15 percent rate cut when the program launches.
Progressive is promising discounts of up to 25 percent as it expands their TripSense pilot program in Minnesota. Progressive says it will use the data only for potential discounts and not to penalize customers whose devices reveal risky driving habits.
Comment: We would know the truth if the used-car dealer states that the auto was only driven to church and back on Sundays.
AIG Faces a Sanction on PNC Transactions
The Wall Street Journal, September 2004
Regulators have warned American International Group, Inc. that it could face civil action over transactions that they say allowed PNC Financial Services Group to improperly keep bad loans off the banks books.
The possible civil lawsuit against the financial services titan, tied to its dealings with the Pittsburgh company, is part of an initiative by the SEC to crack down on businesses that allegedly aid in fraud. The agency has a number of similar investigations under way.
This is a shot across the bow to tell companies to pay attention to whom they are dealing with and what the purpose of their transaction is.
Caught off-guard when Enron Corp.’s collapse showed the extent to which companies used sophisticated financial engineering to manipulate results, regulators increasingly have turned their sights to the financial services companies that assist in the transactions.
Comment: No company should aid fraud of other companies. I applaud the SEC and its effort to challenge business decisions made for the wrong reason.
AIG to Settle Investigations
The Wall Street Journal, November 24 and 25, 2004
AIG said it has agreed to pay $126 million to settle federal allegations that the insurance giant helped two customer companies (see above) commit accounting fraud. Under an agreement awaiting SEC approval, AIG will pay a $46 million fine to the watchdog agency to settle issues surrounding transactions that helped PNC Financial Services Group pump up its earnings. A PNC subsidiary has agreed to pay $115 million in civil fines and restitution to settle the SEC’s allegations of security fraud.
AIG will also pay $80 million to the U.S. Department of Justice to settle a related investigation and avoid prosecution. The tentative deal to wrap up those investigations came as The Wall Street Journal reported that federal prosecutors are investigating whether AIG Chairman Maurice Greenberg manipulated the company’s share price in 2001 to save money on a big acquisition. Greenberg is said to have called the office of Dick Grasso, then chairman of the New York Stock Exchange, to ask him to help shore up the stock’s sinking price. Under terms of the $23 billion acquisition of American General, AIG would have had to pay more in stock—and possibly much more—if AIG’s share price dipped below a predetermined level in a ten-day period shortly before the deal was finalized.
Comment: It appears AIG and its long time chairman, Maurice “Hank” Greenberg have their hands full paying their way out of fraud and misconduct to avoid criminal prosecution.
By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics