NewsNotables – Issue 48

Enron Execs Going Away, but Fraud Is Here to Stay

The Wall Street Journal and The New York Times, May 26, 2006
The convictions of Enron’s fallen chief executives Kenneth Lay and Jeffery Skilling were widely described as providing closure to an era of accounting scandals that brought down several companies and executives in recent years. But corporate malfeasance has proved resistant and cyclical, often erupting when the stock market is riding high and euphoria trumps vigilance.

Fraud has come in waves, from widespread stock fraud suspected before the 1929 market crash that led to greater regulation of securities, to the junk bond scams of the 1980s to the savings and loan failures in the late 1980s, to the purposely exaggerated dot-coms in the late 1990s.

Lay and Skilling, who guided Enron through its spectacular rise and even more stunning fall, were found guilty of fraud and conspiracy. They are among the most prominent corporate leaders convicted in the parade of scandals that marked the get-rich excesses and management failures of the 1990s.

Although the next scandal is impossible to foresee, market experts see a number of potential trouble spots, including the hedge-fund world, which is lightly regulated but increasingly popular and accessible to everyday investors. Stock-option backdating has been recently added to the list (see article below).

The jurors said they found the testimony of Lay and Skilling both revealing and damning. They simply could not believe they were telling the truth when they claimed they didn’t realize that something was rotten at Enron. “The jury has spoken and they have sent an unmistakable message to boardrooms across the country that you can’t lie to shareholders, you can’t put yourself in front of your employees’ best interest, and no matter how rich and powerful you are you have to play by the rules,” stated Sean M. Berkowitz, the director of the Justice Department Enron Task Force.

Comment: For a company that once seemed so complex that almost no one could understand how it actually made its money, the verdicts ended up being fairly simple. Lay and Skilling were found guilty of lying to investors, employees, and regulators in an effort to disguise the crumbling fortunes of their energy empire.

Technology and Easy Credit Give Identity Thieves an Edge

The New York Times, May 30, 2006
In a Scottsdale police station, a 23-year-old methamphetamine user showed officers a new way to steal identities. Browsing a government Web site, he pulled up a local divorce document listing the parties’ names, addresses, and bank account numbers, along with scans of their signatures.

With a common software program and some check stationery, the document provided all he needed to print checks in his victim’s names. It was all made available by the county recorder’s office. The site had thousands of identities.

“We’re trying to keep up with technology,” said Lt. Craig Chrzanowski, who runs Scottsdale’s property crimes division, including a computer crimes unit started two years ago. “But they’re getting better.” The county’s Web site, which earned a place in the Smithsonian’s permanent research collection on information technology innovation, has made Social Security numbers and other information, once viewable only by visiting the county recorder’s office, accessible to anyone with an Internet connection.

In Arizona, one in six adults had their identities stolen in the last five years, about twice the national rate. Arizona officials have responded with a preventive mantra — shred all documents and avoid giving Social Security numbers or bank account numbers to strangers over the telephone or the Internet.

Comment: It’s hard to imagine government officials being so cavalier and sloppy with people’s private information. Technology innovation is great but consequences must be evaluated in advance of their institution.

McAfee Fires Top Lawyer Amid Stock-Option Probe

The Wall Street Journal, May 31, 2006
McAfee’s general counsel was fired after an internal review of stock-options granting practices, making another casualty amid a widening government probe that now involves at least 20 companies. The McAfee termination brings to nearly a dozen executives and directors at five different companies who have lost their jobs in recent weeks amid government and company investigations of timing of options grants to senior corporate officials.

Federal regulators are looking at whether companies backdated stock options to take advantage of low prices just before sharp increases in share prices. Backdating would run afoul of securities laws governing disclosure and fraud, as well as lead to accounting and tax problems.

A statement from McAfee said the company terminated its general counsel after it became aware of one episode involving the general counsel in 2000 that was improper.

Comment: This is just one many recent articles concerning prominent companies where patterns of hitting frequent lows in stock-option pricing is suspect. The Wall Street Journal published another article titled, “At HealthSouth, an Options Issue,” on the same day, May 31, 2006. A review of securities filings shows that Richard Scrushy, the former chief executive of HealthSouth Corp., repeatedly received stock options dated at low points in the company’s stock price, raising questions about the company’s options-granting practices.

Scrushy is long gone from HealthSouth, fired by its board in 2003 after accounting fraud brought the hospital company to the brink of bankruptcy. More than a dozen subordinates pleaded guilty in the $2.7 billion fraud. At his trial last year, Scrushy was acquitted of all 36 counts against him.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics