The roundup of former top corporate executives is starting to resemble a scene out of Goodfellas, where the Ray Liotta character swapped a plea in exchange for testifying against his former cronies.
This time it’s former WorldCom controller David Myers who admitted to his role in the largest accounting scandal in U.S. history—a scandal that eventually drove the onetime telecom giant into bankruptcy.
Myers pleaded guilty to filing false documents with securities regulators, conspiracy to commit fraud, and securities fraud. Reportedly he said he was directed by the company’s senior management to falsify the books.
The fraud charges each carry a sentence of 5 years, while the false filing charge could get Myers 10 years in prison.
Of course, it’s likely Myers will spend less time behind bars, particularly since it seems he is cooperating with federal prosecutors in their attempts to build a case against his former boss, indicted ex—WorldCom CFO Scott Sullivan. Myers’s cooperation might even prove crucial in helping the government establish a case against WorldCom founder and ex-CEO Bernard Ebbers. Ebbers has not been charged with any crime so far.
Myers is the first WorldCom executive to plead guilty for participating in one of the most audacious accounting frauds, hiding more than $7 billion in expenses.
He reportedly told U.S. District Judge Richard Casey: “I was instructed on a quarterly basis by senior management to ensure that entries were made to falsify WorldCom’s books to reduce WorldCom’s actual reported costs and therefore to increase WorldCom’s reported earnings.”
Asked whether he knew what he did was wrong, Myers responded, “Yes sir, I did.”
Swartz’s Go-Away Money? $45 Million
According to an article in the New York Times, former Tyco finance chief Mark Swartz received a severance package of $44.8 million in cash at the same time he was being investigated by a Manhattan grand jury. That jury later indicted Swartz on fraud charges.
The Times article claimed it obtained a copy of the August 1 severance agreement from a person close to the investigation of Swartz and his former boss, onetime Tyco CEO L. Dennis Kozlowski.
The pay package was approved on August 14 by two board members serving on Tyco’s compensation committee.
The amount paid to Swartz was not disclosed to shareholders. He hammered out the deal on the same day he resigned from Tyco at the urging of Edward D. Breen, who was hired to run the company after Kozlowski was indicted on tax-evasion charges in June.
Earlier this month, both Swartz and Kozlowski were indicted for stealing $600 million from the conglomerate.
Under the terms of Swartz’s latest pay package, Tyco cannot sue him for return of the money, according to the Times. Rather, disputes must be settled through arbitration.
Tyco, however, defended the payment, indicating to Reuters that Swartz was the only person who was in a position to restructure the finances of the company, which faced a $1.5 billion funding gap.
“He’s entitled to get this money unless he’s convicted of a crime,” Tyco spokesman Gary Holmes told Reuters. “If the charges against him are proved, we will get all the money back…We had no legal grounds to withhold the money paid to him.”
Added Holmes: “We had no choice but to give up the [$44.8 million],” noting that Swartz received only one-third of the money to which he was entitled under a prearranged formula. “But, we got him to give up $91 million even though he was entitled to it.”
All in All, Just Another Brick in the Wall
Bit by bit, regulators in Washington are attempting to reconstruct the Chinese Wall on Wall Street.
The latest effort: Citigroup Inc. officials will meet with officials in Washington Friday to discuss a proposed settlement of alleged conflicts of interest between the bank’s research and investment-banking business, according to Bloomberg, citing people familiar with the situation.
Under the settlement proposal, Citigroup will recommend separating its investment-banking unit from its stock research, said the wire service.
Citigroup executives will meet with regulators from the Securities and Exchange Commission, the National Association of Securities Dealers, and the New York Stock Exchange, said the report. The banking giant will also propose paying a fine.
The settlement, in fact, could wind up serving as a model for other banks being investigated.
Interestingly, the report of the possible settlement came on the same day that Bloomberg reported in an unrelated story that the SEC may require brokerages to separate investment banking from stock research and allocation of initial public offering shares.
This would be part of the SEC’s attempt to rein in the conflicts of interest that have permeated Wall Street for years.
Bloomberg did note, however, that its SEC source conceded that crafting a standard would be complicated and time-consuming since each company’s business operations are different.
“We are evaluating what structural reforms are appropriate to address these issues and are considering the full range of possible reforms,” said SEC enforcement director Stephen Cutler and inspections chief Lori Richards, according to the report.
Earlier this week, Citigroup agreed to pay $5 million to settle NASD charges that former telecom analyst Jack Grubman advised investors to buy shares of Winstar Communications Inc.—even though he knew the company was crumbling at the time.
And earlier this year, Merrill Lynch paid $100 million to settle with New York Attorney General Eliot Spitzer after internal E-mails by Merrill analysts showed they privately criticized stocks that they were publicly recommending.
In May, the SEC instituted what is expected to be the first of many rules—prohibiting analysts from reporting to investment bankers and then receiving compensation related to banking deals. Analysts also must reveal in research reports and television appearances how much stock they own in companies they discuss.
Enron Partnership Files for Bankruptcy
The infamous LJM2 partnership, which played a major roll in the downfall of Enron Corp. and its creator, former chief financial officer Andrew Fastow, has filed for Chapter 11 bankruptcy.
The reason: a slew of lawsuits from its creditors.
“The most pressing reason was the fact that the lenders had filed a lawsuit against the partnership for repayment of the loan in the Supreme Court of New York, and we did not have the ability to repay that loan,” Bettina Whyte, the chief representative of the restructuring firm now running LJM2, told Reuters.
The partnership filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Texas, in Dallas. LJM2 has assets of $68 million and liabilities totaling $125 million.
LJM2 invested about $450 million in mostly Enron-related deals, and the value of those investments is now about $46 million, according to Reuters.
CFOs Less Upbeat
Chief financial officers of U.S. companies are less optimistic about the U.S. economy and prospects for their own companies than they were last quarter, according to the quarterly survey conducted by Financial Executives International (FEI) and Duke University’s Fuqua School of Business.
More than one-third (37 percent) of those surveyed are less optimistic about the U.S. economy this quarter than they were last quarter, while 31 percent said they are more optimistic and 32 percent felt about the same.
In the June survey, 21 percent said they were less optimistic and 47 percent felt more optimistic relative to the previous quarter.
Most CFOs do not expect the United States to fall back into another recession. Only 35 percent believe there is the likelihood of a double-dip recession.
The finance executives are not exactly bracing for rip-roaring growth, either. The CFOs in aggregate expect GDP growth of just 2 percent during the coming year; they expected 3 percent growth back in June.
When it comes to their own companies, 45 percent of the CFOs said they are more optimistic this quarter. However, that’s down from last quarter, when 54 percent of the respondents said they were more optimistic about their company’s economic prospects. And this quarter, 29 percent say they are less optimistic, compared with only 17 percent who were less optimistic last quarter.
However, the CFOs are not very upbeat about earnings growth. Sure, 59 percent of the respondents expect earnings to grow in the fourth quarter, but they peg that growth at 4 percent. Back in June, 74 percent expected earnings growth in the third quarter. Moreover, that group were predicting, on average, a 14 percent growth in their companies’ earnings.
No surprise, then, that CFOs, on average, expect to increase capital spending by just 1.2 percent in the coming quarter. The reason: more than half (51 percent) cited uncertainty about the economy.
When given a list of nine potential risk factors affecting the U.S. economy, 42 percent said they are most concerned about consumer confidence and consumer spending. Other top-cited risk factors were global unrest and the risk of terrorism (combined response, 20 percent), lack of capital spending (13 percent), and the stock market decline (12 percent).
Among a list of eight positive economic factors, 57 percent said the resilience of the American economic system makes them feel most confident about prospects for the U.S. economy. This was followed by interest-rate levels (17 percent).
“Despite the recession, despite a sliding stock market, despite other negative economic trends, CFOs have expressed consistent optimism about the economy and their companies in our surveys,” said John Graham, finance professor at Fuqua and director of the survey. “Even though earnings projections are still positive, we’re starting to see cracks in that optimism.”
Asked about employment plans, 35 percent of the CFOs said they expect to increase their number of employees, while 23 percent expect a reduction. The rest (42 percent) plan no net change.
Overall, this translates into an expected reduction in employment of 0.1 percent.
Altogether, 397 CFOs from public and private companies from a broad range of industries, geographic areas, and revenues responded to the survey.