If you were asked the question ???what was the most memoriable event to happen during the last decade??? what would you say Would you say the passing of Micheal Jackson Would you mention the Rihanna/ Chris Brown fight You mention Richard Scrushy, Martha Stewart, Bernard Maddoff If you mentioned them, you are headed in the correct direction. Last decade I feel will without a doubt be remember for all of the corporate crime that was commited. Ceo??™s lied and received big bonuses for it. CFO??™s and accountants ???cooked??? the books to paint the illusion that their companies were doing much better than expected. Everyone had the same idea, how can I make a lot of money and a lot of them did. Making these large profits did not come with consequence. Many of them had to repay millions of dollars. Majority of them went to jail. All of them lost our trust. In my paper I will examine how corporate corruption lead to the business failures of Tyco International, Worldcom, and Enron.
Enron was the country??™s largest trader and marketer for electric and natural gas energy. It made money by buying energy at a negotiated price and, later, selling the energy when prices increased. As an energy broker, Enron provided a service by allowing producers to negotiate a certain price while Enron took the risk that prices would fall below what it bought energy. Buyers of energy also benefited because Enron could ensure an available supply of energy. In 2002 Enron was listed number five on the Fortune 500, rated fifth based on sales. Today, Enron is in Chapter 11 bankruptcy protection and has sold its primary energy trading unit. Enron has interests in utilities, power plants, and energy projects around the world, but it is selling assets to pay off debt; it sold its North American energy trading unit to Swiss bank UBS in 2002. The collapse of Enron and the destruction of corporate documents related to its audit have become the focus of congressional investigations.
In February 2001 Fortune magazine named Enron as the ???most innovative company in America??? for the sixth consecutive year. And, on April 17, 2001, Enron announced an 281% in revenues and a 20% increase in net income. Its stock was trading near $60. Things began to fall apart in October, however, when Enron reported an adjustment in earnings of over $1 billion in its SEC filings, resulting in a $618 million loss for the third quarter. Because of the magnitude of the adjustment, the Securities and Exchange Commission (SEC) requested that Enron provide information on its reported transactions. On this news Enron??™s stock and credit rating plummeted. Then, in November Enron??™s chief rival Dynergy announced interest in acquiring Enron. The merger deal quickly fell apart, however; and, by December Enron filed for bankruptcy protection under Charter 11. Enron??™s financial position quickly deteriorated. In January 2002, the New York Stock Exchange filed to de-list Enron from its stock exchange.
Lawsuits and Congressional hearings quickly followed. The Texas attorney general launched an investigation into 401(k) losses at Enron and possible tax liabilities owed to Texas. In the U.S. Senate, the Permanent Investigative Subcommittee subpoenaed documents of 49 Enron executives and, separately, the corporate records of Enron and Arthur Andersen. It, then, became public that in October, just before the filing of the third quarter SEC filing, Enron and its auditor Arthur Anderson had destroyed financial and audit records. By March at least six Congressional committees were investigating Enron and Anderson. Arthur Anderson was indicted by the Justice Department and in June 2002 was found guilty of obstruction of justice.
Under pressures from creditors, in January 2002, C.E.O. Kenneth L. Lay resigned from his executive position and in February resigned as Chairman of the Board of Directors. The Board of Directors announced that it intended to conduct an orderly transition to a new Board composed of new, independent directors. A new management team stepped in, led by Stephen Cooper, a 30-year veteran of corporate disasters from the crisis management firm Zolfo Cooper. Cooper took over as Enrons interim chief executive. McMahon, one of the chief critics of Enrons questionable accounting practices, was named CFO following the departure of former CFO Andrew Fastow. In June Jeffery McHahon resigned a President and COO.
Enron??™s dealings to hide its true earnings also implicated many other firms. Merrill Lynch and other brokerage firms have been criticized for the way that Enron??™s stocks were marketed given the firms questionable performance. Citibank and J.P. Morgan Chase & Co. were accused of providing Enron with multimillion-dollar loans that helped the company disguise its true financial condition. Citigroup and Credit Suisse First Boston are accused in a lawsuit of defrauding investors that bought $2.5 billion in notes linked to the performance of Enron Corp. The Federal Energy Regulatory Commission contends that Enron contributed to California??™s recent energy crisis by charging excessively high rates and is requiring restitution.
Politics and politicians have also been blemished by Enron. Senator Phil Gram (Rep., Texas) is retiring after a 23 year political career. His wife Wendy Gramm was an Enron Director who exercised stock options before bankruptcy. Army Secretary Thomas White was vice chairman of Enron Energy Services, until May 2001, and may have had knowledge of the complicated accounting practices that are being blamed for the companys downfall. While both parties benefited from Enron??™s largess, recent revelations show that the Bush Florida campaign paid $13,000 to Enron Corp., and $2,400 to Halliburton Co., for the use of their jets.
If 6,500 employees of Enron have lost their jobs and retirement funds, higher ups at Enron did well. On the last business day before filing for bankruptcy, Enron executives awarded themselves $55 million in cash bonuses on top of another $50 million in bonuses just weeks earlier. The year before, Chairman Kenneth L. Lay and more than 140 other top company officials got almost $310 million in salaries, bonuses, long-term incentives, loan advances and other payments, but they made much more, $434.5 million, by exercising stock options and receiving stock from the company.
What Enron did: During the 1990??™s Enron set up special entities treated ???off the balance sheet???. Enron created businesses, sometimes joint ventures or partnerships. To capitalize these businesses Enron would find investors, sometimes, these were executives at Enron or friends. Sometimes there was no ???investment???. These newly created businesses often would sell stocks. One company named ???Raptor??? invested in internet technologies, and as Raptor??™s stock prices rose, Enron reported the stock increase as profits. When internet stocks fell, Enron invented a business called ???Braveheart???. A Canadian bank invested $115 million in the business backed by a guarantee from Enron, if the business fell. Enron, then, reported the Canadian loan to Braveheart as Enron profit. Other special entities created by Enron would do business with Enron. They would lease or buy equipment from Enron, for example. Enron would report the lease or sale as Enron income, boosting corporate profit. The price of the lease or sale would be arbitrarily set, and, often, there would be no actual cash transferred. Also, Enron would lease-back property that was ???sold??? to a newly created business. Investors in the new business could receive lease income from Enron and, perhaps, pay little or nothing for the property bought from Enron. Treating these businesses ???off the balance sheet??? meant that Enron pretended that these businesses were autonomous, separate firms. But, if the new business made money, Enron would report it as income. If the new business lost money or borrowed money, the losses and debt were not reported by Enron. All of this helped to create an image that Enron??™s profits were much higher than they were and that Enron??™s debt was much less that it was. The effect was to improve Enron??™s stock price performance, until it all unraveled.
Update: (Jan. 2003) December 2, 2001 Enron filed for bankruptcy under Chapter 11. The company is now restructuring and selling off assets and businesses. The top management team team have resigned as well as many on the Board. Enrons stock de-listed from the NYSE is now traded as ENRNQ over-the-counter. California Congressman Henry Waxman is calling for an investigation of the political connections that may have helped Enron grow so fast. Former CEO Key Lay is to appear before Congressional hearing in February. There is speculation that this testimony may lead to his prosecution.
The latest information about the company can be obtained from http://www.enron.com/corp/. An article “What Went Wrong at Enron: An In-depth Guide for All” is available at http://www.thedailyenron.com/documents/20020812133932-91317.asp.
WorldCom is two companies, each with its own stock. The WorldCom Group contains WorldComs data, Internet, and international operations, including business long-distance. The facilities-based network operator manages one of the leading IP (Internet protocol) backbone systems. The MCI Group includes consumer and small-business units. It is the #2 long-distance carrier in the US, behind AT&T. WorldCom??™s shares once traded near $64 in 1999, but recently declined to less than a dollar.
The company started in Mississippi after the monopoly of AT&T was dismantled. WorldCom bought up spare telephone time and repackaged it at bargain prices. In a low-margin business, WorldCom needed to grow to survive. In 1997 WorldCom paid $37 billion to acquire MCI. An attempt in 1999 to acquire Sprint was thwarted by antitrust regulations. The failed merger pushes WorldCom??™s stock down. Acquisitions continued, and in 1990 WorldCom acquired more than 75 firms. At the same time, WorldCom expanded its telecommunications services, including internet and data traffic. By 2001WorldCom owned a third of the USs high speed data cables and became the second biggest long-distance phone operator.
The MCI acquisition began to negatively impact WorldCom??™s performance in late 1999 as businesses faced a down-turn and cut spending on telecom services and equipment. WorldCom??™s stock fell as profits dissipated. CEO Bernie Ebbers restructured the company into its telecom business (MCIT) and other its other businesses (WCOM). But, the greater problem was that WorldCom had amassed a tremendous amount of debt to finance acquisitions and growth: $41 billion of debt against assets of $107 billion. Bernie Ebbers had personally borrowed $366 million from WorldCom, and investor concern about the company??™s finances sent its stock to below $10.
To conceal the corporation??™s performance and to maintain stock price, between January 2001 and March 2002 WorldCom reported operating expenses as capital costs ??“ hiding expenses that belonged on the Income Statement by reporting them on the Balance Sheet as an asset gain. A proper accounting of WorldCom??™s performance would reveal net losses in 2001 and in the first quarter of 2002.
In March 2002 the SEC requested information from WorldCom on its accounting procedures and loans to executives. The following month the credit rating for WorldCom was downgraded. In April CEO Bernard Ebbers was fired by the Borad amid slumping share prices and a SEC probe of the companys support of his personal loans. Vice Chairman John Sidgmore became CEO and replaced the company??™s auditor Arthur Andersen with KPMG. On discovery of the $3.5 billion miss-accounting, Sidgmore publicly disclosed the financial problem. The Chief Financial Office was fired, and the company announced that it would lay off more than twenty percent of its employees to cut costs ans ell off about $2 billion of non-core businesses. The day after Sidgmore??™s announcement the SEC filed charges of fraud against WorldCom. Before trading was halted, the share price fell to nine cents.
WorldCom has sought Chapter 11 bankruptcy protection; and, retired founder Ebber??™s $1.5 million pension for life is in question. Still, if debtors and investors lost, Bernie Ebbers reaped nearly $140 million from seeling WorldCom stock over the past decade while the former CFO Sullivan sold more than $45 million of stock before being fired for his role in the accounting scam.
Update: Top management and Board members have resigned as WorldCom restructures under Chapter 11. Michael D. Capellas has been appointed Chairman and CEO. He is the former president of Hewlett-Packard Company. The company is working on a plan for future operations and for settling claims.
Current information about World Com can be found at http://www.worldcom.com/infodesk/.
TYCO is a conglomerate of diverse businesses acquired through acquisitions. The largest unit is electronics (connectors, conduits, and printed circuit boards); the fire and security services unit is the world leader in security and fire-protection systems; the health care group makes bandages, crutches, and respiratory care equipment; the telecommunications unit makes undersea fiber-optic cable. Tyco acquired CIT, the financial services unit, but three months later sold the acquisition. Tyco has been an aggressive acquirer of companies, and in the past three years the company made 700 acquisitions worth $8 billion.
Tyco raised eyebrows when in 1997 it incorporated in Burmuda, expressly to avoid U.S. corporate taxes. The large number of mergers that have been behind Tyco??™s growth have provided the company with complicated, but legitimate, tax avoidance schemes. Although there had been persistent rumors about Tyco??™s accounting of its mergers, an informal Securities and Exchange Commission investigation into its accounting of acquisitions begun in December 1999 ended in July 2000 with nothing more than some recommendations for changes in procedures.
Lack of confidence in Tyco??™s accounting had an adverse effect on its stock. And, the acquisition of CTI Group surfaced additional problems. When its was disclosed that a Tyco director had been paid $10 million to arrange the acquisition of CIT Group, a company in which the director held substantial stock, the conflict of interest problem sent the stock downward. There were also disturbing signs about CIT??™s financial performance under Tyco. CIT Group as a part of Tyco made considerably more profit than it had made when it was autonomous. This seemed to confirm prior rumors that a practice of Tyco was to have targeted companies expense merger costs before the merger was consummated, so that the post merger profits would look better ??“ boosting Tyco??™s stock on the report of superior earnings.
To attempt to restore confidence, in January 2002 Tyco announced plans to split itself into four companies. Investors were cool to the proposed breakup, however, and Tyco abandoned it three months later. Tyco did sell its recently acquired financial services unit, CTI Group, through an IPO.
In June 2002 Tyco??™s Chairman and CEO Dennis Kozlowski was indicted by Manhattan District Attorney for evading state and local taxes of over $1 million. The indictment charged that Kozlowski purchased six paintings for roughly $13 million for his Fifth Avenue apartment in Manhattan, but he shipped the art to Exeter, N.H., where Tycos operational headquarters are located. By shipping out of state, Kozlowski got around paying New York sales tax on the art. Worried about further decline in Tyco??™s stock price, Kozlowski resigned and was replaced by Edward D. Breen. The stock market reacted favorably, and Tyco??™s shares 45.8 percent, to close at $12.03.
Breen undertook an investigation of how ousted Kozlowski, with salary and compensation of $112.5 million including potential gains from stock options, used company funds for personal gain. Kozlowski allegedly borrowed $23 million at low interest from a stock-loan plan to buy more than $13 million in art. Tyco also sued its former general counsel for return of a $10 million loan used to buy a resort home in Utah. Use of corporate funds for personal benefit without reporting to stockholders is a criminal violation of SEC rules.
By June 2002, the culmination of scandals at Tyco surfaced rumors of a renewed SEC investigation into its accounting practices. New York prosecutors had already stated that they would consider indicting the whole company if their probe showed financial miss-dealings.
Update: Kozlowski and others have been indicted. The company also has filed a civil suit against Kozlowski for misusing company funds. Former director Frank Walsh Jr. pled guilty to securities fraud and has made restitution.