Accounting Scandal Updates and Other Fraud on June 30, 2004
Bob Jensen at Trinity University

Many of the scandals are documented at http://www.trinity.edu/rjensen/fraud.htm 

Resources to prevent and discover fraud from the Association of Fraud Examiners --- http://www.cfenet.com/resources/resources.asp 

Self-study training for a career in fraud examination --- http://marketplace.cfenet.com/products/products.asp 

Source for United Kingdom reporting on financial scandals and other news --- http://www.financialdirector.co.uk 

Updates on the leading books on the business and accounting scandals --- http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

I love Infectious Greed by Frank Partnoy ---  http://www.trinity.edu/rjensen/Fraud.htm#Quotations 

Quotations

Accounting Education Shares Some of the Blame --- http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation 

In all, four months in a minimum-security prison seemed like a small price to pay for the millions of dollars Mozer made. In 2001, Mozer was enjoying his wealth--relaxing, and raising his eight-year-old daughter. He spent much of his time managing his own money and playing golf. Mozer's treatment raised an interesting question: what would most people have done in his situation--assuming they knew in advance they would be caught and spend four months in a low-security prison--if they also knew that, afterward, they would retire as a multimillionaire, all before their fortieth birthday? Compared to Mozer, his supervisors received mere slaps on the wrist. Gutfreund, Strauss, and Meriweather paid fines of $100,000, $75,000, and $50,000, respectively--just a few days' pay, at their salaries.
Frank Partnoy, Infectious Greed (Henry Holt and Company, 2004, Page 109) with respect to derivatives fraud at Salomon.
Bob Jensen's threads on slaps on the wrist for white collar crime are at "White Collar Crime Pays Big Even If You Get Caught" at http://www.trinity.edu/rjensen/fraudconclusion.htm#CrimePays 

According to a joint survey by PricewaterhouseCoopers and the Economist Intelligence Unit, financial institutions have equated good corporate governance with meeting the demands of regulators rather than improving the quality of management. PwC suggests how to comply and improve in order to reap the potential strategic advantages of improved governance.
SmartPros, April 7, 2004 --- http://www.smartpros.com/x43179.xml 

"The conviction rate in these cases is 85 percent in federal court," said Ira Lee Sorkin, a New York defense lawyer and former prosecutor. "It's not hard to win these cases."  Last week, Jamie Olis, a former midlevel executive at Dynegy, a Houston energy company, was sentenced to more than 24 years in prison for his role in accounting fraud at the company. The sentence was one of the most severe imposed in a white-collar fraud case, prosecutors and defense lawyers said.
Alex Berenson, "Despite 2 Mistrials, Prosecutors Rack Up White-Collar Victories," The New York Times, April 4, 2004 --- http://www.nytimes.com/2004/04/04/business/04TYCO.html 

The Pentagon's Inspector General found that proper accounting procedures weren't followed (by Boeing) in negotiating a $1.32 billion contract between Boeing and the Air Force.
J. Lynn Lunsford, "Air Force Criticized by Pentagon Over $1.32 Billion Boeing Deal," The Wall Street Journal, April 16, 2004 --- http://online.wsj.com/article/0,,SB108208168346084728,00.html?mod=home_whats_news_us 

A U.S. Department of Labor (DOL) administrative law judge recently issued what is believed to be the first ruling on whistleblower protections under The Sarbanes-Oxley Act. The DOL ruled that a bank's former CFO was unlawfully terminated after protesting suspected insider trading.
FERF Newsletter on April 6, 2004 
Bob Jensen's threads on whistle blowing are at http://www.trinity.edu/rjensen/fraudconclusion.htm#WhistleBlowing 

In cautionary tales told while on probation, Karen Bond and Walt Pavlo have advice for those with assets: It pays to be constantly vigilant of financial caretakers and corporate executives.
Aissatour Sidme (See below)

The economic downturn, the default and the currency conversion all combined to leave Argentina's lenders on the hook for billions of dollars. Citigroup was among them. In the fourth quarter of 2001 and the first quarter of 2002, the bank took more than $1.2 billion in pretax charges for bad loans and other losses in Argentina. The bank, the world's largest, ultimately wrote off about $2 billion in soured Argentine loans and investments.
Timothy L. O'Brien (See below)

Pays to go bankrupt!
MCI predicted a net loss for this year and reported a massive $22.2 billion profit for 2003 as a result of accounting adjustments related to the bankruptcy.
Shawn Young, The Wall Street Journal, April 30, 2004, Page B3 --- http://online.wsj.com/article/0,,SB108327600038897861,00.html?mod=technology_main_whats_news 

The New York State Attorney General's office has doubled the amount of money it won in fines and restitution last year, thanks to a number of multimillion-dollar settlements with firms on Wall Street. 
AccountingWEB, April 13, 2004 --- http://www.accountingweb.com/item/99018 

Quattrone was found guilty after a retrial on charges that he interfered with a U.S. investigation in late 2000. The verdict, after less than a day of deliberations, was a comeback victory for the government's campaign against corporate abuses.
Randall Smith, The Wall Street Journal, May 4, 2004 --- http://online.wsj.com/article/0,,SB108360692902400374,00.html?mod=home_whats_news_us 

Computer Associates International Inc. fired nine employees yesterday for involvement in a widespread accounting fraud, bringing the total number forced out to 14.
Charles Forelle and Joann S. Lublin, "Will CA's Kumar Survive Scandal Or Lose His Job?" The Wall Street Journal, April 20, 2004 --- http://online.wsj.com/article/0,,SB108239189677386678,00.html?mod=technology_main_whats_news 

Joyti De-Laurey, a former personal assistant to ex-Goldman Sachs star telecom banker Scott Mead, was found guilty of stealing about $7.7 million from Mead and another Goldman banker and his wife.
Anita Raghaven, "Secretary Found Guilty In Goldman Case in U.K.," The Wall Street Journal, April 20, 2004 --- http://online.wsj.com/article/0,,SB108246140634287677,00.html?mod=home_whats_news_us 

Three former employees of Duke Energy Corp. were arrested after a federal grand jury indictment was unsealed in Houston that accused the trio of 18 counts of racketeering and defrauding their onetime employer through a false energy-trading and accounting scheme.
Rebecca Smith, "Former Employees Of Duke Charged Over Wash Trades," The Wall Street Journal, April 22, 2004 --- http://online.wsj.com/article/0,,SB108257549068489537,00.html?mod=home%5Fwhats%5Fnews%5Fus 

Mr. Brown said the dispute with the auditor about disclosing the borrowings occurred in March 2001 as the company and Deloitte were preparing Adelphia's 2000 annual report. Deloitte issued a clean audit opinion in that report. He said he was able to convince the Deloitte auditor not to disclose the total amount the Rigases had borrowed, but to disclose only the amount the Rigases could borrow under the arrangement. "I didn't want the public to know how much the Rigases had borrowed because I thought there would be significant negative ramifications," Mr. Brown said. He testified that Timothy Rigas told him "we should give up on other points if we have to, but that's the last point we want to give up on with the auditors."
Christine Nuzum (see below)

For an account of how badly a whistle blower on accounting fraud at Duke Energy was treated, see "Duke Whistle-Blower Goes Public," by Ted Reed,  The Charlotte Observer, August 19, 2002 --- http://dukeemployees.com/audit3.shtml 

Paychecks are now more politically correct, but CEO wallets won't shrink overnight. See which executives nabbed the juiciest pay bonanzas last year.
Bob Jensen's threads on corporate governance frauds are at http://www.trinity.edu/rjensen/Fraud.htm#Governance 
"Here Comes Politically Correct Pay," The Wall Street Journal, April 12, 2004 --- http://online.wsj.com/page/0,,2_1081,00.html?mod=home_in_depth_reports 

Welcome to the new world of politically correct pay, where directors increasingly scrutinize their leader's compensation through the eyes of irate shareholders, workers and regulators. That already means some big changes are in the works. But nobody should weep for the CEO just yet: Even the most sweeping moves won't shrink chief executives' bulging wallets overnight.

"Bank One Settles Allegations Over Improper Fund Trading," The Wall Street Journal, June 29, 2004 --- http://online.wsj.com/article/0,,SB108854358741950719,00.html?mod=us_business_whats_news 

A unit of Bank One Corp. agreed to a $90 million settlement of allegations by the New York attorney general's office and the Securities and Exchange Commission that it allowed a hedge fund to make improper mutual-fund trades.

The settlement Tuesday by Banc One Investment Advisors Corp., which comes days before the Chicago bank merges with J.P. Morgan Chase & Co., makes the Bank One unit the last to settle charges related to market-timing abuses of the original four firms mentioned in New York Attorney General Eliot Spitzer's September complaint against hedge fund Canary Capital Partners.

Banc One Advisors said in a news release that it will return $50 million -- $40 million in a civil fine and $10 million in disgorgement -- to eligible shareholders as part of the settlement. The firm also agreed to reduce fees by $40 million over five years.

"Soon after we first learned of these investigations, we committed to cooperate with regulators, make restitution to shareholders, and review and change our policies," David J. Kundert, chief executive of Banc One Investment Advisors, said in a prepared statement, adding that procedures are now in place to "prevent a recurrence of similar issues in the future."

Mark Beeson, the former chief executive of the Banc One fund unit, was ordered to pay a civil fine of $100,000. He is also barred from the fund industry for two years and prohibited from acting as a director or officer for a mutual fund or investment adviser for three years, the SEC said in a news release.

Stephen Cutler, director of the SEC's division of enforcement, said Mr. Beeson "blatantly disregarded the well-being" of long-term fund shareholders by allowing Canary Capital to market time the One Group family of funds, and by providing Canary confidential information on fund portfolio holdings.

The mutual-fund scandal, in which fund companies profited by allowing a few sophisticated traders to buy and sell shares in ways that hurt the returns of regular investors, has implicated as many as 20 fund companies and involved millions of investors. So far, mutual-fund companies have agreed to settlements totaling more than $2 billion, with most of that money pegged to be returned to investors.

The scandal encompasses both market timing -- rapid buying and selling of fund shares to exploit inefficiencies in fund-share pricing -- and late trading, which is illegal. Late traders buy or sell fund shares after the market's 4 p.m. close, while using the price determined at the close. Market timing, while not illegal, often violates a fund's stated rules.

Bob Jensen's threads on the mutual funds scandals are at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

"Two Siebel Executives Had Loose Lips, SEC Says:  Company Is the First One Charged Twice for Violating The "Fair Disclosure" Rule," by David Bank and Debora Solomon, The Wall Street Journal, June 30, 2004, Page C3 --- http://online.wsj.com/article/0,,SB108852785824650351,00.html?mod=technology_main_whats_news 

Executives at Siebel Systems Inc. haven't learned when to keep quiet, the Securities and Exchange Commission says.

The SEC yesterday said Siebel and two of its senior executives violated the commission's fair-disclosure rules last year when the executives privately gave institutional investors a rosier picture of the company's prospects than had been disclosed publicly only days earlier, contributing to a one-day, 8% jump in Siebel shares.

Siebel is the first company to be charged twice with violating the SEC's Regulation FD (for "fair disclosure"), which was adopted in October 2000 to put small and large investors on an even playing field for access to corporate information. In November 2002, the San Mateo, Calif., maker of business software agreed to pay a $250,000 civil penalty, without admitting wrongdoing, after the SEC questioned remarks made by chairman and founder Tom Siebel at an investor conference.

Yesterday the SEC also charged Siebel with violating an agreement, stemming from the earlier violation, to adhere to the fair-disclosure rule. In another first, the agency charged Siebel with violating an SEC rule that requires companies to maintain procedures to ensure that information is disclosed to all investors in a timely fashion.

Because of the repeat nature of the alleged violations, the SEC asked a federal judge in New York to issue a permanent injunction barring Siebel from future violations. The SEC also asked for an injunction restraining the two executives from "aiding and abetting" violations of the rules. The agency also is seeking fines against Siebel and the two executives, but didn't specify the size of the possible fines.

The detailed complaint shows how some companies allegedly continue to try to bolster relationships with key investors by offering more information than they share with the broader public. The fair-disclosure rules, adopted in the wake of the tech-stock bubble, are intended to help small investors by combating a once-common practice whereby large investors or analysts would get market-moving information ahead of the public.

A Siebel spokesman declined to comment on the new charges.

The charges are the latest in a series of controversies that have swirled around Siebel and its brash founder, who stepped aside as chief executive earlier this year. In January 2003, Mr. Siebel canceled all stock options he had received since 1998 after criticism by some large investors about excessive executive compensation.

The latest complaint doesn't name Mr. Siebel personally. But the SEC claims Kenneth Goldman, Siebel's chief financial officer, and Mark Hanson, the company's former director of investor relations and now senior vice president for corporate development, in April 2003 selectively disclosed financial information in one-on-one meetings with institutional investors.

Early that month, Siebel said it wouldn't meet previous forecasts for first-quarter earnings. The company repeated a gloomy outlook in a conference call following the release of its earnings on April 23. Five days later, Mr. Siebel expounded on the pessimism in a speech at an investor conference. "With war, with famine, with disease, I mean it's like the apocalypse out there," the SEC quotes Mr. Siebel as saying.

Then, on April 30, according to the complaint, Messrs. Goldman and Hanson met with fund managers at Alliance Capital Management, a family of mutual and hedge funds, and attended a dinner hosted by Morgan Stanley. At the Alliance meeting, the SEC says, Mr. Goldman said Siebel's level of sales activity was "better," that the company had deals in its "pipeline" valued at more than $5 million, and that the pipeline was "growing."

The SEC complaint says two Alliance portfolio managers who hadn't held Siebel stock placed orders to purchase 114,200 shares immediately following the meeting, while markets were still open. A third fund manager, alerted by colleagues who had attended the meeting, by the next day had covered a short position of 108,200 shares -- a net change of 222,400 shares. The Alliance fund manager who held the short position had viewed Siebel as "kind of a small junky company," according to the SEC. An Alliance spokesman declined to comment.

According to the complaint, the two Siebel executives made similar remarks at the Morgan Stanley dinner that evening, attended by six institutional investors and Morgan Stanley employees. Early the next morning, the SEC says, Morgan Stanley sent e-mail to hundreds of individuals, detailing the "positive data points" from the dinner, including the growing pipeline. Two fund managers who attended the dinner bought Siebel shares the next morning.

That day, May 1, Siebel shares jumped 8% to $9.34, with trading volume nearly double the average daily volume for the previous 12 months, the SEC said.

As the stock rose, Jeffrey Amann, Siebel's general counsel, asked Mr. Goldman by e-mail whether additional disclosure was required. Mr. Goldman responded late that evening that he had "only reiterated exactly what was stated on the earnings call." Mr. Hanson told Mr. Amann rumors about Mr. Goldman's comments were false, the SEC says.

Continued in the article

Bob Jensen's threads on accounting fraud are at http://www.trinity.edu/rjensen/fraud.htm 

Question
How can you "PUT" away your cares about clear-cut rules of accounting?

Answer
See how AOL did it in conspiracy with Goldman Sachs

It just gets deeper and deeper for Ernst & Young

With the AOL-Time Warner deal due to close in just three months, Bertelsmann needed to reduce its AOL Europe holding -- pronto. But the obvious buyer, AOL, didn't want to own more than 50% or more of the venture, either. Going above half might trigger a U.S. accounting rule that would force AOL to consolidate all the struggling unit's losses on its books when AOL was already grappling with deteriorating ad revenues and a declining stock price. Enter Goldman Sachs Group Inc. (GS ) Business Week has learned that the premier Wall Street bank agreed to buy 1% of AOL Europe -- half a percent from each parent -- for $215 million. AOL Europe, in return, agreed to a "put" contract promising Goldman that it could sell back the 1% by a specific date and at a set price. That simple transaction solved Bertelsmann's EU problem without trapping AOL in an accounting conundrum -- a perfect solution.

"Goldman's 1% Solution," by Paula Dwyer, Business Week, June 28, 2004 --- http://www.businessweek.com/@@ajkOUmUQQWvg7RMA/premium/content/04_26/b3889045_mz011.htm?se=1 

Goldman's 1% Solution
In 2000, it cut a questionable deal that smoothed the AOL-Time Warner merger. Will the SEC take action?

In more ways than one, the news from the European Union was bad. It was October, 2000, and the EU's executive arm, the European Commission, had just jolted America Online Inc. with a ruling that its pending acquisition of Time Warner Inc. (TWX ) could harm competition in Europe's media markets, especially the emerging online music business. The EC was concerned that AOL was a 50-50 partner with German media giant Bertelsmann in one of Europe's biggest Internet service providers, AOL Europe. Now the EC was ordering Bertelsmann to give up control over AOL Europe.

With the AOL-Time Warner deal due to close in just three months, Bertelsmann needed to reduce its AOL Europe holding -- pronto. But the obvious buyer, AOL, didn't want to own more than 50% or more of the venture, either. Going above half might trigger a U.S. accounting rule that would force AOL to consolidate all the struggling unit's losses on its books when AOL was already grappling with deteriorating ad revenues and a declining stock price.

Enter Goldman Sachs Group Inc. (GS ) Business Week has learned that the premier Wall Street bank agreed to buy 1% of AOL Europe -- half a percent from each parent -- for $215 million. AOL Europe, in return, agreed to a "put" contract promising Goldman that it could sell back the 1% by a specific date and at a set price. That simple transaction solved Bertelsmann's EU problem without trapping AOL in an accounting conundrum -- a perfect solution.

LEGAL HEADACHES 

Or so it seemed at the time. But the deal also may have violated U.S. securities laws. The Securities A: Exchange Commission and the Justice Dept. have construed some deals involving promises to buy back assets at a specific time and price as share-parking arrangements designed to mislead investors. The former chief executive of AOL Europe says the Goldman deal may have kept up to $200 million in 2000 losses off of the combined AOL-Time Warner financials -- enough, he says, that Time Warner might have tried to change the terms of the $120 billion merger, since AOL wouldn't have looked as healthy. But as the deal moved toward consummation, the Goldman arrangement was never disclosed in public documents to AOL or Time Warner shareholders.

The AOL Europe transaction threatens to create problems for Goldman Sachs. But it could also prolong the legal headaches of Time Warner Inc., as the AOL-Time Warner combine is now called. For the past two years, Time Warner has been in heated negotiations with the SEC over AOL's accounting for advertising revenues (BW -- June 7). Just as the SEC is wrapping up that case -- it could warn Time Warner as early as this summer that it intends to bring civil fraud charges -- the Goldman transaction raises troubling new questions about AOL's financial dealings prior to the merger.

The SEC has not brought charges over the 1% solution, and an SEC spokesman would not comment on whether the agency is probing the deal. Time Warner spokeswoman Tricia Primrose Wallace says the company will not comment on any part of the Goldman arrangement. A lawyer for Stephen M. Case, AOL's chairman and CEO at the time of the deal, referred questions to Time Warner. Thomas Middelhoff, who was Bertelsmann's chairman at the time of the deal and negotiated the AOL Europe joint venture with Case in 1995, says through a spokesman that the sale of a 0.5% stake was "purely a financial technique" handled by others. And Lucas van Praag, a Goldman Sachs spokesman, says: "We handled this entirely appropriately. We don't believe there is anything untoward here."

Continued in the article

 

"University of California, Bank Sue AOL:  Lawsuit claims firm lied about finances, cost them," by Pamela Tate, The Wall Street Journal, April 15, 2003 --- http://www.yourlawyer.com/practice/printnews.htm?story_id=5448 

The University of California has joined with Amalgamated Bank to file a lawsuit against AOL Time Warner Inc., claiming their stakes have lost more than $500 million in value because the media company allegedly lied about its financial condition.

The University of California, which dropped out of a federal class-action suit against AOL earlier this month, filed the complaint Monday in the Superior Court of California in Los Angeles. The university and co-plaintiff Amalgamated Bank, a New York institution that manages funds for several dozen union pension funds, are being represented by Milberg Weiss Bershad Hynes & Lerach.

The plaintiffs allege that AOL Time Warner materially misrepresented its revenue and subscriber growth after the merger of AOL and Time Warner in January 2001. In two separate restatements in October and March, AOL slashed nearly $600 million from previously reported revenue over the past two years.

The University of California and Amalgamated allege that AOL's admissions so far have been "too conservative," and that the company may have overstated results by almost $1 billion.

In a March 28 filing with the Securities and Exchange Commission, AOL Time Warner said it faces 30 shareholder lawsuits that have been centralized in the U.S. District Court for the Southern District of New York. The company said in the filing it intends to defend itself "vigorously." The lawsuit filed by the University of California and Amalgamated names several current and former AOL Time Warner executives, as well as financial-services giants Citigroup and Morgan Stanley.

Citigroup is the parent of Salomon Smith Barney, now called Smith Barney, which with Morgan Stanley allegedly reaped $135 million in advisory fees from the AOL and Time Warner merger.

Defendants include Stephen Case, who resigned as chairman in January; former Chief Executive Gerald Levin, who left the company in May; current Chairman and Chief Executive Richard Parsons; and Ted Turner, who recently stepped down as vice chairman.

The lawsuit claims they and more than two dozen other insiders sold off $779 million in stock just after the merger closed but before the accounting revelations that would cause the stock price to plummet. The suit also names AOL's auditor, Ernst & Young.

The University of California claims it lost $450 million in the value of its AOL Time Warner shares, which were converted from more than 11.3 million Time Warner shares in the merger. At the end of 2002, the value of the university's portfolio was at $49.9 billion.

Continued in the article

Bob Jensen's threads on the Ernst & Young auditing scandals are at http://www.trinity.edu/rjensen/fraud.htm#Ernst 

"As Doctors Write Prescriptions, Drug Company Writes a Check," by Gardner Harris, The New York Times, June 27, 2004 --- http://www.nytimes.com/2004/06/27/business/27DRUG.final.html?hp 

The check for $10,000 arrived in the mail unsolicited. The doctor who received it from the drug maker Schering-Plough said it was made out to him personally in exchange for an attached "consulting" agreement that required nothing other than his commitment to prescribe the company's medicines. Two other physicians said in separate interviews that they, too, received checks unbidden from Schering-Plough, one of the world's biggest drug companies.

"I threw mine away," said the first doctor, who spoke on the condition of anonymity because of concern about being drawn into a federal inquiry into the matter.

Those checks and others, some of them said to be for six-figure sums, are under investigation by federal prosecutors in Boston as part of a broad government crackdown on the drug industry's marketing tactics. Just about every big global drug company — including Johnson & Johnson, Wyeth and Bristol-Myers Squibb — has disclosed in securities filings that it has received a federal subpoena, and most are juggling subpoenas stemming from several investigations.

The details of the Schering-Plough tactics, gleaned from interviews with 20 doctors, as well as industry executives and people close to the investigation, shed light on the shadowy system of financial lures that pharmaceutical companies have used to persuade physicians to favor their drugs.

Schering-Plough's tactics, these people said, included paying doctors large sums to prescribe its drug for hepatitis C and to take part in company-sponsored clinical trials that were little more than thinly disguised marketing efforts that required little effort on the doctors' part. Doctors who demonstrated disloyalty by testing other company's drugs, or even talking favorably about them, risked being barred from the Schering-Plough money stream.

Continued in the article

"Crimes of Others Wrecked Enron, Ex-Chief Says," by Kurt Eichenwald, The New York Times, June 27, 2004 --- http://www.nytimes.com/2004/06/27/business/27ENRO.final.html 

As Mr. Lay describes it, the Enron collapse was the outgrowth of the wrong-headed and criminal acts of the company's finance organization, and specifically its chief financial officer, Andrew S. Fastow. He says that both he and the board were misled by Mr. Fastow about the activities and true nature of a series of off-the-books partnerships that played the decisive role in the company's collapse.

Yet, Mr. Lay still argues that some of the company's most controversial decisions — including some that set up financial conflicts of interest for Mr. Fastow that could well be unprecedented in corporate America — were made for good reasons, and can be seen as mistakes only in hindsight.

The interview was conducted in Mr. Lay's office in downtown Houston. There, a picture window frames the old Enron skyscraper across town, a sight he said he rarely contemplates during his days working as a consultant for two start-up companies.

The years since the Enron collapse have transformed Mr. Lay. The changes in his financial status are stunning. At the beginning of 2001, Mr. Lay said, he had a net worth in excess of $400 million — almost all of it in Enron stock. Today, he says his worth is below $20 million, and his total available cash not earmarked for legal fees or repayment of debt is less than $1 million.

But the changes amount to more than just money. A man once celebrated in business and political circles, today he is widely vilified as bearing significant responsibility for Enron's downfall, a debacle that cost thousands of employees their jobs, millions of investors their savings, and, for a time, forced a nation to question the capital markets system. He is often portrayed as a man who bailed out of his company as it was sinking, selling millions of shares even while telling investors and employees that he believed in the company's future.

It is a portrait, he insists, that disregards the realities of Enron's last months, a time in which he describes himself as first working hard to improve the company, then struggling desperately to keep it afloat.

A Reversal of Fortune

Now, according to witnesses who have testified before the grand jury and other people involved in the investigation, prosecutors are focusing almost exclusively on Mr. Lay's actions and statements in the months preceding bankruptcy, in an effort to determine if he deceived investors about the true state of Enron before its demise even as he was selling his own stock.

However, a review of Mr. Lay's financial and trading data shows that the facts are much murkier than is generally believed, with the stock sales being forced by lenders as he took numerous actions that are consistent with someone trying to minimize his sales.

To date, numerous executives who worked for or advised Enron have pleaded guilty to crimes or been charged with wrongdoing. Virtually the entire senior management has faced legal proceedings: its treasurer, chief financial officer, primary outside accountant, corporate secretary and even a division head have all pleaded guilty to crimes. Others, including Jeffrey K. Skilling, another former chief executive, and Richard A. Causey, the former chief accounting officer, have been charged with fraud.

Mr. Lay himself has remained under investigation that entire time, and - at what he said was his legal team's insistence - invoked his Fifth Amendment right against self-incrimination in testifying before Congress.

Ken Lay's secret recipes for legally looting $184,494.426 from the corporation you manage --- http://www.trinity.edu/rjensen/FraudEnron.htm#SecretRecipes 

"Spitzer Inquiry Expands to Employee-Benefit Insurers," by Joseph B. Treaster, The New York Times, June 12, 2004 --- http://www.nytimes.com/2004/06/12/business/12insure.html 

Three big insurance companies, Aetna, Cigna and MetLife, said yesterday that they had received subpoenas from the New York attorney general as an investigation widened into the field of employee benefits - health, disability and group life insurance.

Hartford, which operates a substantial business in group life and disability insurance as well as in commercial and personal lines of insurance, said late Thursday that it, too, had received a subpoena.

Until now, the insurance investigations by the attorney general, Eliot Spitzer, have centered on potential conflicts of interest among commercial insurance brokers and suspected improper sales and trading of variable annuities, which are a combination of insurance and mutual funds.

Investigators have been concerned that payments from insurance companies to the brokers for exceeding sales goals and keeping down claims costs may undermine the brokers' loyalty to their customers - the American corporations that pay them fees and commissions to arrange coverage.

Industry executives said similar fees, often referred to as contingency payments, were widely paid to brokers and consultants by the employee benefits companies.

"It's no surprise that Mr. Spitzer is pursuing these contingency payments in the employee benefits area," said Terry Havens, the chief executive of Havensure, a small employee benefits consulting firm in Cincinnati. "Employers will likely be surprised to find out that their intermediaries - brokers and consultants - are negotiating financial agreements for themselves that raise the cost of corporate insurance."

None of the employee benefits insurers would discuss the investigations, and a spokesman for Mr. Spitzer did not return a call.

Several insurance brokers disclosed in late April that they had received subpoenas from Mr. Spitzer, including Marsh and Aon, the two largest in the world, and Willis Group Holdings. In mid-May, the Chubb Group, a leader in commercial insurance, said that it, too, had received a subpoena for documents dealing with compensation to brokers. Hartford said in late May that it had received instructions from the New York Department of Insurance not to destroy any documents related to its dealings with brokers. The brokers have also refused to discuss the investigations.

Industry executives said that most of the midsize and smaller companies in the country bought health insurance and other employee benefits through the big insurance brokers. But many of the biggest corporations rely, instead, on consulting firms that specialize in employee benefits and often work for negotiated fees, they said.

Executives said they thought that the consultants often received payments on both ends of transactions just as the brokers have acknowledged they do. But so far none of the consulting firms have reported receiving subpoenas.

Tom Beauregard, a senior executive at Hewitt Associates, one of the nation's largest consultants on employee benefits, said that his firm received payments exclusively from its clients except in cases where the client negotiated for an insurance company to share the costs of the consultant. When clients ask for those kinds of payments, he said, they are fully disclosed and included in estimates of all companies bidding for the coverage.

The question of disclosure has been at the heart of Mr. Spitzer's investigations of the brokers so far. The brokers often report on Web sites and in regulatory documents that they receive compensation from the insurance companies. But the corporate insurance buyers, known as risk managers, say the brokers do not routinely disclose the details of the payments.

Risk managers - who often feel dependent on brokers to get coverage, which since the Sept. 11, 2001, attacks has been costly and scarce - say they do not press for details. But even when the risk managers raise questions, some of them say, the brokers can be evasive.

Joe Conway, a spokesman for Towers Perrin, another big consultant on employee benefits, said that compensation agreements at his firm were reached in advance by clients and that the full amount of the compensation was disclosed.

Mr. Havens, who has been an employee benefits consultant for 25 years, said that in addition to bonuses for exceeding sales goals, some brokers and consultants receive extra payments from insurers for the many employees who buy life insurance or disability insurance to supplement the coverage provided by their companies. The cost of these payments, which often average $10 to $15 for each employee, are passed on directly to the employees, he said, increasing the price of the coverage they buy.

In the employee benefits field, Mr. Havens said, the sales bonuses and the extra payments for individual employees are in many cases done without the knowledge of the employers or the employees.

"The employers and the employees don't know the payments are in there," Mr. Havens said. "At the initiative of the brokers, the insurers provide a quote with the costs of these payment included."

Mr. Havens said his practice was to report to clients all payments he receives from all sources. But he said he had lost business to some brokers and consultants who, as a result of hidden payments from insurers, were willing to charge clients less for their services.

"Carriers have complained to me that they have to make these payments," Mr. Havens said. "They don't think they are appropriate. But if they don't pay, they don't get to play in the game. They don't get the business."

Brokers and consultants began demanding payments from the insurance companies about 10 years ago when they began to receive complaints from clients that their fees and commissions were too high, Mr. Havens said. While the amount that consultants and brokers received stayed at 1 percent to 5 percent of the premium, Mr. Havens said, the visible portion that employers paid to them declined.

Bob Jensen's threads on mutual fund and insurance company scandals are at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds 

Scam o Rama --- http://www.scamorama.com/ 

The letters posted here illustrate attempts at ADVANCE FEE FRAUD. The sender claims to be a bureaucrat, banker or royal toadie, who wants to cut you, and only you, in on the financial deal of a lifetime.

In plain English, the writer claims to be in a position to skim public accounts. Hint: There is no money to be laundered - except yours. Palms must be greased. They ask for money with which to do the greasing. A few K here, a few K there... eventually you get wise, and retire to lick your wounds. Dead military officer, dead farmer, dead bank customer, reformed murderer, imaginary request for bid, lotto prize, different countries... same scam.

Setting aside the writer's attempt to rob you and (going through the mental contortions necessary to take the letter at face value) to steal from his own country, the letters are funny. Read them out loud at parties and see. The 100+ letters below introduce the literary genre of the Lads from Lagos. Some people write the scammers back. See right column.

Most readers say "what an obvious scam!".
Some say "I was almost fooled till I saw this site."
A handful say "couldn't mine be 'real'?"
Stay safe out there!

Notes:
1    When not playing on your generosity or naivete, the Lads are asking you to steal. There is nothing to be stolen, except from you.
2     Nothing here should be taken as a criticism of any nation, nor do we suggest that there are no scam artists in other countries. There sure are.
3     So why "Lads from Lagos" ? Because most of these e-mails come from there. It's just like that. Africans hate getting them too.

---

THE FIRST 125

You never forget your first 125.
Below each letter is a list of them all.

Request for Urgent Business Relationship
Son of Urgent Business Relationship
Urgent Business Execution
Trust Fund for Alms and Ammunition
We did over-inflate the contracts
My brother Maj. Hamza El-Mustapha and his mistress in Lebanon
Confidentiality is our watchword, mutual trust is our beacon
I was a moslem until a 18months ago when the master Jesus met me
I am only trying my best not to be noticed by my government
Ein Ausländer, Verstorbene Ingenieur Johnson Creek
Mrs. Abacha gets a PhD

---

REALITY CHECK SECTION

WHO WOULD FALL FOR THIS? - HERE'S WHO
NICE THINGS PEOPLE SAY
SARCASTIC FAQ (updated mar 9 2004)
SCAM SELF CHECKLIST

Bob Jensen's threads on scams and scam protections are at http://www.trinity.edu/rjensen/FraudReporting.htm 

Question
What's "affinity fraud?"

Answer:  See below

A key fund-raiser for Harvard University used his connection to the school to defraud benefactors out of millions of dollars, showing how sophisticated professional investors can be just as vulnerable as amateurs.

"Harvard Parents Got a Hard Lesson In Investing Perils:  A Key Fund-Raiser for School Is Convicted of Bilking Wealthy Donors, Alumni." by Randall Smith, The Wall Street Journal, June 11, 2004, Page A1 --- http://online.wsj.com/article/0,,SB108690562744434417,00.html?mod=home_whats_news_us 

Karen Fleiss had good reason to trust Gregory Earls.

Both had children at Harvard College and they knew each other as donors to the Harvard Parents Fund, which Mr. Earls headed for a time with billionaire Robert Bass. Mr. Earls was a deal maker with a penchant for high-risk investments; Ms. Fleiss was a hedge-fund manager.

So when he asked her to invest in one of his companies in 1998 -- and intimated that Mr. Bass might, too -- she opened her hedge fund's checkbook, eventually putting almost $1.8 million into the venture.

"He had a Southern accent and a big smile, and he would say, 'Karen, I have a deal for you,' " she recalls. "By the time he was finished, it sounded like the deal of a lifetime."

It wasn't. When she cashed out, all she had to show for her investment was $50,000. Ms. Fleiss was one of three wealthy Harvard parents and alumni who recently testified about being bilked by Mr. Earls. The authorities say he stole much of the money they invested with him, siphoning off cash as he passed it through another company he controlled. In the ledgers, the skimmed funds were camouflaged as legal, management or accounting fees.

All told, prosecutors say, Mr. Earls defrauded more than 100 investors of $13.8 million. They say Mr. Earls diverted $1.2 million to an education trust fund for his own children, and $4.3 million more to other personal accounts.

The Harvard connection and other fund-raising activities gave Mr. Earls "access to a pool of potential investors who were very wealthy, and he knew how to talk those people into investing with him," prosecutor William Stellmach said at the trial.

In April, Mr. Earls was convicted of 22 counts of fraud in Manhattan federal court after one investor took his suspicions to prosecutors. In court, Mr. Earls acknowledged moving investors' money to various accounts he controlled -- which he attributed to "sloppy business practices" -- but denied stealing.

His lawyer, Barry Coburn, said in court that Mr. Earls couldn't have had criminal intent to steal because he kept records of the amounts diverted. The investors "lost their money because the Internet bubble expanded and expanded and popped," Mr. Coburn argued. They didn't have "some kind of money-back guarantee."

Mr. Coburn says his client declines to comment on the details of his case. "Mr. Earls has been convicted by a jury," Mr. Coburn says. "It would not be appropriate in my view for us to respond to particular factual allegations in this context given that Mr. Earls is facing sentencing."

As described by prosecutors, Mr. Earls's scam appears to be a variation of "affinity fraud," in which victims are lulled into dropping their guard by mutual ties to the same religious organization or ethnic group. Mr. Earls cultivated important contacts through his work for the Harvard Parents Fund and the Boys & Girls Clubs of Greater Washington, D.C. -- and used data supplied by Harvard to assess likely investors.

The case shows that sophisticated professional investors can be just as vulnerable as amateurs. Much of the money Mr. Earls stole came from a handful of wealthy Harvard benefactors, including a former aide to junk-bond impresario Michael Milken. Even Harvard found itself short-changed. Mr. Earls reneged on three separate pledges totaling $275,000 that he made while he headed the parents fund, a school official testified at his trial.

Mr. Earls, 59 years old, grew up in Bluefield, W.Va., and attended the University of Virginia. In the 1970s, after stints as a gym teacher, mutual-fund salesman and stockbroker, he recruited others to invest with him in projects including movies, theaters, apartments and microwave-oven retailers. The 1980s saw him organizing investment groups that bought stakes in numerous enterprises.

In the mid-1990s, Harvard's development office took notice of Mr. Earls as a potentially productive fund-raiser for the Harvard Parents Fund. He was a big donor to the school, and three of his four children eventually enrolled there. His lawyer says in an interview that recruiting investors wasn't the principal motive for his unpaid volunteer work.

Harvard fund-raising officials are angry about what happened. "The fact that someone would volunteer their time for a nonprofit and then use that opportunity to line their own pockets is an outrage," says Andrew Tiedemann, communications director for alumni affairs and development at Harvard. "We have never seen anything remotely like this in Harvard history."

One of Mr. Earls's most important fund-raising assignments was Robert Bass, one of the well-known Bass brothers from Texas, who had made numerous high-profile investments in the 1980s. The two men met in connection with Harvard Parents Fund activities, and Mr. Bass's daughter Chandler, who entered Harvard in 1996, became "good friends" with Mr. Earls's daughter Kate, Mr. Bass testified.

Continued in the article

Bob Jensen's threads on fraud are at http://www.trinity.edu/rjensen/fraud.htm 

Consumer fraud protections are discussed at http://www.trinity.edu/rjensen/FraudReporting.htm 

I have mixed feelings about convicts exploiting their misdeed experiences for huge lecture and speaking fees.  They often do have valuable and inspirational speeches and recorded material, but should they be making huge fees after serving time for ripping off the public.  In fairness, some to some pro bono presentations for schools, but in most instances their fees are enormous for speeches and lectures.

"After Serving Time, Executives Now Serve Up Advice," by Christopher S. Stewart, The New York Times, June 1, 2004 --- http://www.nytimes.com/2004/06/01/business/01convict.html 

Corporate executives facing trials for misdeeds at work are grappling with the possibility of a long stretch in prison. But they can take comfort in the fact that business is booming for a few executives-turned-felons who have turned their stories into topics on the lecture circuit.

From a former finance executive to a lawyer who specialized in civil litigation, some white-collar criminals are getting paid several thousand dollars to talk about their crimes to business schools, professional associations and corporations.

"It's a powerful message," said Kellie McElhany, professor of corporate management at the Haas School of Business at the University of California, Berkeley. She has had Walter Pavlo, the former senior manager of collections at MCI who spent more than a year and a half in prison after he was convicted of wire fraud and money laundering, speak at the school's Center for Responsible Business.

"You actually get to see the consequences of poor ethical decision making," Professor McElhany said.

Gary Zeune, who runs Pros & Cons, a speaker agency in Columbus, Ohio, that specializes in former white-collar criminals, says demand has increased about 30 percent in the last year, helped by the prominent trials of executives like Martha Stewart and L. Dennis Kozlowski, the former Tyco chief executive.

At the same time, a growing number of executives appear to be willing to talk about their misdeeds. Mr. Zeune gets phone calls, e-mail messages and letters almost every other week from former criminals, he said, more than double the number of requests he received two years back. Speakers at his agency are paid $1,000 to $3,000.

But the phenomenon is unlikely to last, said Toby Bishop, president and chief executive of the Association of Certified Fraud Examiners, who has used convicted executives to conduct training and to lecture.

Corporate crime is "just a hot topic now," he said. "And in two or three years, if there are no more corporate scandals, it will be replaced by something else."

But for now, white-collar criminals are in demand. Mr. Pavlo of MCI is one of Mr. Zeune's most popular speakers. Since his release in 2003, he has earned more than $30,000.

In his speeches, Mr. Pavlo talks about how he devised a complicated accounting scheme with an outside partner that yielded $6 million in stolen customer money in six months, and he describes what he was thinking at the time of the crime.

This year, he says, he could earn $150,000 to $200,000, charging as much as $5,000 for a speech.

Andrea Bonime-Blanc, senior vice president and chief ethics and compliance officer at the New York office of Bertelsmann Media Worldwide, hired Mr. Pavlo in March for a quarterly executive meeting she holds on the topic of ethics. While it was the first time she had hired a former convict, she said it went over very well.

Karen Bond, a lawyer in Ohio who served 38 months for interstate securities fraud, has talked widely in the media about Martha Stewart's conviction for lying about her sale of ImClone Systems stock. Her speaking run, however, may be short-lived. A spokesman for Ms. Bond, Somer Stephenson of Stephenson Consulting Group in Califon, N.J., said she was no longer available, citing probation issues. Ms. Bond did not return repeated phone calls for comment.

Mark Morze was convicted in the late 1980's of stock fraud, wire fraud and tax evasion while an executive at the carpet cleaning company ZZZZ Best. After emerging from prison in 1994, he hit the speaker's circuit and says he has consistently made $60,000 to $80,000 a year. Mr. Morze is a regular at the Graziadio School of Business at Pepperdine University, where his message is deterrence.

The presence of corporate felons on the talk circuit has been reported by Crain's New York Business.

Public speaking is not a real option for most white-collar criminals, Mr. Zeune said. "You have to have a compelling story and take responsibility for what you did, which is something a lot of criminals won't do."

Even for the few who find speaking jobs, success can be elusive.

David London, who served 11 months for fraud committed while he was chief executive of the former People's Bank of Unity in Pennsylvania, worked as a clerk at a local medical center and did general labor for a film studio after he was released in 1998. Today, he is a speaker with Mr. Zeune's group, but he gives only a handful of lectures a year, making pocket money. He lives in the extra room of an old friend's house and, to make ends meet, he works as a mortgage broker and officiates at college and high school sporting events.

"I can't get a decent job anymore," Mr. London, 61, said. "All my life was in banking, over 30 years. Even if I tried to get a night job at a hotel in auditing, I wouldn't be able to get it. "

Bob Jensen's threads on proposed reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

June 9, 2004 reply from Ed Scribner [escribne@NMSU.EDU] 

Bob,

At least, as I understand it, Barry Minkow donates his speaking fees to restitution fund for the victims of ZZZZBest.

Ed

June 9, 2004 reply from Bill Dent [billdent@UTDALLAS.EDU] 

Ed:

I am not sure "donates" is the appropriate term. According to Knapp in his book, Contemporary Auditing--Real Issues and Cases, the federal court ordered Mr. Minkow to pay the victims of the ZZZZ Best fraud $26 million.

Bill

In a case that illustrates what used to be common practice before Sarbanes-Oxley became law, Big Four accounting firm PricewaterhouseCoopers agreed to pay $50 million to settle a class action suit involving its former audit client Raytheon. http://www.accountingweb.com/item/99230 

Bob Jensen's threads on PwC scandals are at http://www.trinity.edu/rjensen/Fraud.htm#PwC 

From the Scout Report on May 7, 2004

World Bank: Anticorruption ---  http://www1.worldbank.org/publicsector/anticorrupt/index.cfm

In its many different guises, corruption around the world tends to affect the poor, who are often the most reliant on the provision of public services, and are also least likely to be able to pay the extra costs associated with bribery and fraud. The World Bank has identified corruption as "the single greatest obstacle to economic and social development," and thusly has set up this anticorruption website to serve as an online resource for policy-makers, non-governmental organizations (NGOs), and other interested parties. On the site, the World Bank lays out its strategy for combating corruption, which includes increasing political accountability, strengthening civil society participation, and improving public sector management. The site also contains a number of helpful resources, such as toolkits for assessing government performance in this area, and information and reports on various regional and country-based approaches to dealing with corruption. The site is rounded out by a calendar of events and key strategy documents, such as "Reforming Public Institutions and Strengthening Governance, A World Bank Strategy."

TITLE: Loophole Limits Independence 
REPORTER: Deborah Solomon 
DATE: Apr 28, 2004 
PAGE: C1,4 
LINK: http://online.wsj.com/article/0,,SB108311078032395529,00.html  
TOPICS: Financial Accounting Standards Board, International Accounting Standards Board, Corporate Governance

SUMMARY: The Solomon article, as well as the related articles, outlines the efforts to "reign-in" the abuses that have been exposed in the governance of some of the biggest corporations in the country in the past several years. The related articles by Burns, Hymowitz, Maremont and Bandler delineate what "should be." The current article depicts, in some cases, what "is."

QUESTIONS: 
1.) What function is served by the compensation committee of a company? Explain in terms of the competing incentives for compensating the chief executives of a firm.

2.) What is a nominating committee? Why is it important that directors be independent?

3.) It has been argued that the underlying philosophy of international accounting standards versus American accounting standards are that the international standard-setting focus is on the "end-product" while the American focus is on the "process." Critics of the American system maintain the focusing on the process provides a roadmap to those disinclined to adhere to the "intent" of the standards. Argue that this is happening in the corporate governance area. Explain in terms of the first paragraph of the Solomon article which begins with, "Dozens of companies are avoiding new rules."

Reviewed By: Judy Beckman, University of Rhode Island 
Reviewed By: Benson Wier, Virginia Commonwealth University 
Reviewed By: Kimberly Dunn, Florida Atlantic University

--- RELATED ARTICLES --- 
|TITLE: Everything You Wanted to Know About Corporate Governance . . . 
REPORTER: Judith Burns 
PAGE: R5-6 
ISSUE: Oct 07, 2003 
LINK: http://online.wsj.com/article_print/0,,SB106676280248746100,00.html 

TITLE: How to Be a Good Director 
REPORTER: Carol Hymowitz 
PAGE: R1-4 
ISSUE: Oct 27, 2002 
LINK: http://online.wsj.com/article_print/0,,SB10667541869215200,00.html 

TITLE: Now Playing: Corporate America's Funniest Home Video 
REPORTER: Mark Maremont and James Bandler 
PAGE: A1-8 
ISSUE: Oct 29, 2003 
LINK: http://online.wsj.com/article_print/0,,SB106735726682798800,00.html 

Bob Jensen's threads on corporate governance are at http://www.trinity.edu/rjensen/Fraud.htm#Governance 

"Loophole Limits Independence," by Deborah Solomon, The Wall Street Journal, April 28, 2004, Page C1 --- http://online.wsj.com/article/0,,SB108311078032395529,00.html 

Dozens of Firms Use Exemption
That Allows Them to Avoid
Rules Mandating Board Structure

Dozens of companies are avoiding new rules intended to make their boards more independent from management, taking advantage of a little-noticed exemption for corporations that are controlled by small groups of shareholders.

The list includes Cox Communications Inc., EchoStar Communications Corp. and Weight Watchers International Inc., which have said in Securities and Exchange Commission filings that a majority of their directors won't be independent. Primedia Inc., Cablevision Systems Corp. and others have said they won't have independent compensation committees to determine executives' pay or independent nominating committees to select director candidates.

These companies are able to escape the new rules required by the New York Stock Exchange and the Nasdaq Stock Market by designating themselves as "controlled" companies in which more than 50% of the voting power rests with an individual, a family or another group of shareholders who vote as a block or another company. This allows them to avoid requirements that were adopted by stock exchanges and regulators after the corporate meltdowns of the late 1990s.

The rules mandate a majority of directors be independent and only independent directors sit on nominating, compensation and audit committees. Independent directors are those who don't work at a company, haven't been employed there within three years and don't have close relatives who work there. All firms must have independent audit committees, even those with a controlling shareholder.

The exemptions are riling some large institutional investors and corporate-governance experts who say they are weakening safeguards established to protect investors and the broader market. They also raise troubling issues at companies where a controlling shareholder may have substantial voting interest but a small economic stake, the critics say.

Don Kirshbaum, the investment officer for policy at the Connecticut State Treasurer's office, said the state became concerned when Dillard's Inc. disclosed that it planned to avoid the rule requiring a majority of directors be independent and that an independent nominating committee select director candidates. The family that controls the Little Rock, Ark., retailer retains 99.4% of voting power through Class B shares. The company's bylaws allow the family to elect eight of its 12 directors, although the Dillard family holds less than 10% of shares outstanding. "This just seemed baffling to us," said Mr. Kirshbaum. "How can a company that is owned mostly by institutional and other investors outside the family not be allowed to elect a majority of the board?" A Dillard's representative said shareholders knew when they bought the stock that the family had the right to elect a majority of the board.

Connecticut's State Treasurer and the Council of Institutional Investors unsuccessfully lobbied the Big Board and the SEC against the exemption. But the SEC signed off on it when it approved the new corporate-governance standards last year.

Under the exemption, "controlled" companies can opt out of the rules on the makeup of boards and their compensation and nominating committees by disclosing that they are controlled companies and outlining the exemptions they plan to take. Approval from regulators or shareholders isn't required. The exemption was written into the rules at the behest of companies with controlling shareholders, according to regulatory officials. When a first draft of the listing standards didn't contain the exemption, some companies lobbied the Big Board and Nasdaq, saying it didn't make sense to require companies with a controlling shareholder to have a majority of independent directors because the large shareholder effectively controlled the board.

"The exception ... was made because the ownership structure of these companies merited different treatment," the New York Stock Exchange said. "Majority voting control generally entitles the holder to determine the makeup of the board of directors, and the exchange didn't consider it appropriate to impose a listing standard that would in effect deprive the majority holder of that right." A spokeswoman for Nasdaq said the exemption "acknowledges the unique ownership rights of a majority controlled company."

Cox Communications, which qualifies for the exemption because it is controlled by the Cox family's Cox Enterprises Inc., said it "doesn't need to have a majority of independent directors for shareholders to be protected because the controlling company's interests are aligned with the shareholders."

Securities lawyers said the exemption was designed in large part for companies controlled by publicly traded parents, such as Kraft Foods Inc., controlled by Altria Group Inc. Because Altria shares trade on the Big Board and are widely held, it must comply with the standards, giving Kraft shareholders protection at the parent company level. But many of the companies that have opted out aren't controlled by a publicly traded parent.

Primedia, a New York publisher, disclosed in an SEC filing earlier this month that it wouldn't have a majority of independent directors or an independent compensation committee and that board nominations would be made by all directors instead of an independent committee. More than 50% of Primedia's voting power is held by investment partnerships controlled by Kohlberg Kravis Roberts & Co.

Continued in the article

Bob Jensen's threads on corporate governance are at http://www.trinity.edu/rjensen/Fraud.htm#Governance 

In essence, the U.S. tax code gives [U.S. multinationals] more in tax breaks for foreign operations than it collects in revenues.
John D. McKinnon (See below)

From The Wall Street Journal Accounting Educators' Review on May 7, 2004

TITLE: U.S. Overseas Tax is Blasted
REPORTER: John D. McKinnon
DATE: May 05, 2004
PAGE: A4 LINK: http://online.wsj.com/article/0,,SB108370777246501914,00.html 
TOPICS: Tax Laws, Taxation

SUMMARY: A study undertaken by Congress's Joint Committee on Taxation concludes that the U.S. government, if it were to switch to a territorial approach to taxation, would collect "$60 billion more over 10 years than the current system would raise." "In essence, the U.S. tax code gives [U.S. multinationals] more in tax breaks for foreign operations than it collects in revenues..."

QUESTIONS:
1.) What is the overall objective of current U.S. tax law with respect to multinational corporations? What is the objective of tax breaks and deductions allowed against income earned by multinationals in other countries?

2.) How is it possible that the current status of U.S. tax law results in a system which costs the U.S. government more than it collects in tax revenues from this system? How would a "territorial approach" to taxation differ from this current system?

3.) Tax law is designed not only to raise revenues for the government but also to encourage behavior beneficial to society and the economy. How do some argue that current tax law influences corporate decisions in locating operations and resultant job growth prospects?

4.) Others argue that changes to current tax law would do more harm than good in influencing job growth in the U.S. economy. What are the factors that argue against changing the current tax law in this area? Specifically comment on how these factors influence U.S. job growth prospects.

5.) A spokesman for Eli Lilly, the pharmaceutical company, says his employer considers a variety of factors in deciding where to locate operations. Suppose that you are a top manager considering opening a new operation to serve a foreign market that covers several countries. List all factors that you expect to consider in your decision making process.

6.) What "added bonus for companies' reported profits" comes with income earned in low-tax countries which management commits to reinvest in those countries? Through what mechanism does this decision influence reported profits? That is, specifically describe what income statement accounts are influenced by this decision and why the accounting reflects this influence.

Reviewed By: Judy Beckman, University of Rhode Island
Reviewed By: Benson Wier, Virginia Commonwealth University
Reviewed By: Kimberly Dunn, Florida Atlantic University

--- RELATED ARTICLES ---
TITLE: Review & Outlook: Export Tax Follies
REPORTER: WSJ Editors
PAGE: A14
ISSUE: May 05, 2004
LINK: http://online.wsj.com/article/0,,SB108371159350602084,00.html

Bob Jensen's threads on the sham called the U.S. Corporate Tax code are at http://www.trinity.edu/rjensen/FraudRotten.htm#TaxAvoidance 

The company's auditor, Ernst & Young, paid $335 million to settle.

"Before Enron, There Was Cendant," by Gretchen Morgenson, The New York Times, May 9, 2004 --- http://www.nytimes.com/2004/05/09/business/yourmoney/09watch.html 

The fraud that time forgot is finally going to trial.

Tomorrow in Federal District Court in Hartford, opening arguments are scheduled to begin in the case against