Fraud Updates on December 31, 2002

Accounting Scandal Updates on December 31, 2002
Bob Jensen at Trinity University

Bob Jensen's main document on the Enron scandal and other accounting frauds is at http://www.trinity.edu/rjensen/fraud.htm

WHAT MAKES AMERICAN CAPITALISM SURVIVE?

Is it the financial reporting and auditing system operating under securities laws?
I don't think so given the repeated cycles of scandals, including the two most recent periods of scandal (i.e., the 1980s S&L scams and the 1990s financial and auditing scandals). Business firms keep watering down the laws and auditing firms are compensated in a way that defies the logic of fairness and independence.

Is it the tort system that makes makes corruption too expensive for corporations and executives?
I don't think so given the fact that executives can salt away stolen fortunes with relatives, friends, and foreign hideaways that remain cached after the lawsuits and even some country-club prison sentences come to an end.

Is it the free press?
If I had to point to the one thing that keeps American capitalism moving on an upward trend during the economic cycles, it is the free press that has become ever more effective in the age of instantaneous world wide networking via email and the Internet. The free press is the the sunshine that brings dark things to light. It is never perfect, and crime often pays. But crime will not destroy the system as long as crime does not stamp out our freedom of the press.

My wrap up of the Year 2002 scandals, including a summary of the largest lawsuits against accounting firms, is provided in this final update on fraud for the Year 2002.

Humor forwarded on December 21, 2002 by Miklos A. Vasarhelyi [miklosv@andromeda.rutgers.edu]

The corporate scandals are getting bigger and bigger. In a speech on Wall Street, President Bush spoke out on corporate responsibility, and he warned executives not to cook the books. Afterwards, Martha Stewart said the correct term was to saute the books.
Conan O'Brien

Martha Stewart denied allegations that she had been given inside information to sell 4,000 shares of a stock in a biotech firm about to go under. Stewart then showed her audience how to make a festive, quick-burning yule log out of freshly-shredded financial documents.
Dennis Miller

In New York the other day, there was a pro-Martha Stewart rally. Only four people showed up ... and three of them were made out of crepe paper!
Conan O'Brien

When reached for comment on the charges, Martha didn't say much, (only) that a subpoena should be served with a nice appetizer.
Conan O'Brien

NBC is making a movie about Martha Stewart that will cover the recent stock scandal. They are thinking of calling it 'The Road To Extradition."
Conan O'Brien

Things are not looking good for Martha Stewart. Her stock was down 23 percent yesterday. Wow, that dropped quicker than Dick Cheney after a double-cheeseburger.
Jay Leno

Tom Ridge announced a new color-coded alarm system. ... Green means everything's okay. Red means we're in extreme danger. And champagne-fuschia means we're being attacked by Martha Stewart.
Conan O'Brien

In January 2002, Senator Joseph Lieberman appeared on CBS' Face The Nation talking about the revelations that Arthur Andersen destroyed documents in the Enron investigation. Lieberman prophetically declared that, "this Enron episode may end this company's history." Even the brilliance of hiring Paul Volcker to reform the firm didn't help Andersen. Within two months Andersen was indicted on criminal charges. Three months later the firm was found guilty, and two months after that formally surrendered it's license to practice auditing. As clients, partners and staff bailed out throughout the year, the 89-year- old giant of the accounting profession was painfully put to rest. View more information on this topic at http://www.accountingweb.com/item/96868

Related Articles
01/11/02 Andersen Admits Destroying Enron Documents
01/21/02 States May Revoke Andersen's License to Practice
01/29/02 Andersen Named in Class Action Suit
02/04/02 Andersen Hires Paul Volcker to Reform, Restore Trust
03/15/02 Andersen Indicted on Criminal Charges
03/28/02 Andersen's Global Network Merger Plans Unravel
06/17/02 Andersen Found Guilty
06/17/02 Andersen to Cease Auditing Publicly-Held Companies
09/03/02 Good-Bye Andersen: Venerable Giant Will Audit No More
09/13/02 Judge Refuses Andersen's Request for New Trial
A complete digest of all Anderson/Enron related stories is available.
A list of Andersen client defections is also available (including where they migrated for future audits)

02/05/02 The 'Angel of Accounting Death' Looms on Wall Street
06/26/02 Andersen Embroiled in $4 Billion WorldCom Accounting Fraud
06/28/02 Adelphia Goes Into Bankruptcy as Deloitte's Role is Questioned
08/16/02 AOL Swears To Financials But Warns of Accounting Errors
08/21/02 Accounting Scandals Take a Toll on Bank Lending Practices
09/16/02 SEC Charges Former Tyco Officers With Fraud
11/25/02 Ex-Peregrine Official Pleads Guilty to Fraud Charges
12/24/02 Time Names Whistle-Blowers as Persons of The Year

Bob Jensen's Summary of Events, Including Weekly Update Links --- http://www.trinity.edu/rjensen/fraud.htm

"Time Names Whistle-Blowers as Persons of the Year", Reuters, December 22, 2002 --- http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=1948721

Time Magazine named a trio of women whistle-blowers as its Persons of the Year on Sunday, praising their roles in unearthing malfeasance that eroded public confidence in their institutions.

Two of the women, Sherron Watkins, a vice president at Enron Corp., and Cynthia Cooper of WorldCom Inc., uncovered massive accounting fraud at their respective companies, which both went bankrupt.

The third, Coleen Rowley, is an agent for the Federal Bureau of Investigation. In May, she wrote a scathing 13-page memo to FBI Director Robert Muller detailing how supervisors at a Minneapolis, Minnesota field office brushed aside her requests to investigate Zacarias Moussaoui, the so-called "20th hijacker" in the Sept. 11th attacks, weeks before the attacks occurred.

"It came down to did we want to recognize a phenomenon that helped correct some of the problems we've had over the last year and celebrate three ordinary people that did extraordinary things," said Time managing editor Jim Kelly.

Other people considered by the magazine, which hits stores on Monday, included President Bush, al Qaeda leader Osama bin Laden, Vice President Dick Cheney and New York attorney general Eliot Spitzer.

Bush was seen by some as the front-runner, especially after he led his party to a mid-term electoral upset in November that cemented the party's majority in Congress.

However, Kelly said "some of (Bush's) own goals: the capture of Osama bin Laden, the unseating of Saddam Hussein, the revival of a sluggish economy, haven't happened yet. There was a sense of bigger things to come, and it might be wise to see how things played out," he added.

Watkins, 43, is a former accountant best known for a blunt, prescient 7-page memo to Enron chairman Kenneth Lay in 2001 that uncovered questionable accounting and warned that the company could "implode in a wave of accounting scandals."

Her letter came to light during a post-mortem inquiry conducted by Congress after the company declared bankruptcy.

Cooper undertook a one-woman crusade inside telecommunications behemoth WorldCom, when she discovered that the company had disguised $3.8 billion in losses through improper accounting.

When the scandal came to light in June after the company declared bankruptcy, jittery investors laid siege to global stock markets.

FBI agent and lawyer Rowley's secret memo was leaked to the press in May. Weeks before Sept. 11, Rowley suspected Moussaoui might have ties to radical activities and bin Laden, and she asked supervisors for clearance to search his computer.

Her letter sharply criticized the agency's hidebound culture and its decision-makers, and gave rise to new inquiries over the intelligence-gathering failures of Sept. 11.

Reply from Dennis Beresford [dberesfo@TERRY.UGA.EDU]

As a new member of the WorldCom board of directors, and as of last week the Chairman of its audit committee, I can assure you that Cynthia Cooper is the "real deal." There are many others to blame for these terrible problems occurring in the first place. However, Cynthia had both the tenacity and courage to speak up immediately when she first discovered the problem. I can't comment about the two other "Persons of the Year" but I assure you that Cynthia Cooper is my personal hero.

Denny Beresford
University of Georgia

Bob Jensen's threads on whistle blowing are at http://www.trinity.edu/rjensen/fraudconclusion.htm#WhistleBlowing

"Staggering Lawsuits Hit CPA Firms," AccountingWEB, December 27, 2002 --- http://www.accountingweb.com/cgi-bin/item.cgi?id=96875

04/12/02 Xerox to Pay Record Financial Fraud Penalty, Investigation Turns to KPMG
04/26/02 Three Big Five Firms Get Sued over 'McScandal'
05/07/02 Andersen Reaches Settlement in Baptist Foundation Lawsuit
06/11/02 PwC Finds Accounting Lawsuits Broke Records in 2001
06/24/02 BDO Seidman Nears End of Case Involving Criminal Charges
07/18/02 PwC Settles Rash of Auditor-Independence Violations
07/29/02 KPMG Gets Probation For Bungling Orange County Audit
08/28/02 Andersen Worldwide To Pay $60 Million in First Enron Settlement
08/29/02 Andersen Worldwide Faces $350 Million RICO Action
09/24/02 Peregrine Files For Bankruptcy, Sues Andersen For $1 Billion
10/22/02 PwC Named in $100 Million Lawsuit
10/29/02 PwC Pays $21.5M to Settle Case With Anicom
11/08/02 H&R Block Slapped With $75 Million Kickback Ruling
12/24/02 E&Y Slapped With $1 Billion Lawsuit

Audits: The Red Flags of Cooked Books, SmartPros --- http://www.smartpros.com/x36406.xml

Dec. 19, 2002 (Partner's Report The Monthly Update for CPA Firm Owners)
Red flags: cooked books. Redwood, Calif.-based Camico Services has identified several signs that should raise suspicions.

Although Camico uses the soon-to-be-upgraded SAS 82, Consideration of Fraud in a Financial Statement Audit, as a partial source for these issues, it also incorporates suggestions from the Association of Certified Fraud Examiners (ACFE). As a result, these will continue to be valid areas on which CPA firm auditors should train a sharp eye:

Revenue substance vs. form.
Actual revenue (substance) can be manipulated by transactions that change it from one form to another and can be misstated by the use of fake customers, receivables, and shipments. Beware of "significant, unusual, or highly complex transactions, especially those close to yearend, that pose difficult 'substance-- over-form' questions," warns SAS 82.

Inadequate disclosures.
Confusing footnotes, such as those used for Enron's special-purpose entities (SPEs) transactions, can cast doubt on the financial statement. If the client includes both a governing board and management personnel, consider whether disclosures are made to both board and management-dual disclosure often makes sense.

Related party transactions.
Using Enron as an example again, its SPEs, such as limited partnerships with outside parties, allowed the company to increase leverage and return on assets without having to report debt on the balance sheet. There is also a potential conflict of interest if managers' or owners' self-interest is-or appears to be-in conflict with the best interests of the company and its shareholders.

Improper asset valuations.
Accurate valuation often requires special expertise. Without quoted prices as the base for valuation, a company could develop and use discretionary valuation models based on its own assumptions and models.

Premature revenue recognition.
Two examples: In the first, the company takes subscription revenue for a multi-year period, obligating it to multi-year expenses, and then recognizes all the revenue in a one-year period. The second is "billing and holding," which creates accounts receivable but lets the company hold the goods, sometimes to ship later, sometimes not at all. This is often used with just a few large customers. Large journal entries at year-end can be the tip-off for this and other frauds.

Percentage-of-completion accounting.
Multi-year projects for which most of the cash is paid in the first year but revenue is spread over the project's duration often indicate fraud. This is especially common among contractors, who are prone to estimating that a project is closer to completion than it really is, which lets them recognize more revenue sooner than they should.

Improper treatment of sales.
Conditional sales -- those contingent on other transactions, which are sometimes counted as final sales -- are an example. Sometimes final sales are reversed but are not indicated as such on the books and, therefore, are not reconciled with inventory. Inventing customers, accounts receivable, and shipments is another way to misstate sales.

Deferral of costs and expenses.
WorldCom's classic misstatement of operational expenses as capital expenditures is a horrifying example of what this can mean. Expenses may be deferred simply by not posting costs and expenses until the next period.

Other indicators:

-- Business relationships deteriorating because those involved in fraud have little respect for others.

-- Auditor independence breaking down from complacency and over-reliance on management representations. Juries are more likely to believe CPAs know about fraud in companies with which they had long relationships.

-- Successful companies are less likely to have their operations questioned than those that are in trouble.

Source: Impact 57 (Fall 2002), Camico ( www.camico.com )

In a decision that broke new legal ground, a federal judge in Houston ruled yesterday that banks, law firms and investment houses that helped construct Enron's off-the-books partnerships could be sued by investors seeking to regain billions of dollars they lost when the company collapsed.
"Ruling Leaves Most Players Exposed to Suits on Enron," The New York Times, December 21, 2002

The AICPA and the Association of Certified Fraud Examiners have jointly developed a one-hour training course that can be used by businesses and given to clients. The course is entitled "How Fraud Hurts You and Your Organization." http://www.accountingweb.com/item/96849

In a Washington speech addressing CPAs and regulators, William F. Ezzell, Chairman of the American Institute of Certified Public Accountants, affirmed the accounting profession's resolve to uphold the public trust and support the provisions of the Sarbanes-Oxley law --- http://www.smartpros.com/x36350.xml

Everyone - Congress, the GAO, the SEC, financial executives, CFO groups, overseas regulatory agencies, the AICPA and other organizations - weighed in on "the new way" that auditors should perform their duties, and CPA firms should be policed. But two people stand out from the crowd and leave their mark - Senator Paul Sarbanes of Maryland and Representative Michael Oxley of Ohio, the authors of the Sarbanes-Oxley Act that will redefine the accounting profession and corporate financial reporting for years to come. View more information on this topic at http://www.accountingweb.com/item/96867

IS THIS THE REFORMER THE SEC NEEDS?
William Donaldson has the right credentials to head the commission. He'll need a lot more than that, though, to change Wall Street's ways http://www.businessweek.com/investor/content/dec2002/pi20021212_2393.htm?c=bwtechdec13&n=link6&t=email

President Bush selected former investment banker William H. Donaldson to head the Securities and Exchange Commission and to restore confidence in markets shaken by a wave of corporate financial scandals. His mission, as outlined by Bush on Tuesday: “to vigorously enforce our nation’s laws against corporate corruption.” --- http://www.msnbc.com/news/845584.asp

President Bush's nominee to lead the Securities and Exchange Commission is targeted in a class-action lawsuit by investors accusing him of fraud for failing to disclose financial problems at Aetna Inc. when he was its top executive --- http://www.smartpros.com/x36333.xml

GAO Blames Robert Herdman
The U.S. General Accounting Office is expected to release a report next week on the events leading up to the appointment of William Webster as Chairman of the Public Accounting Oversight Board. The report is expected to place the lion's share of the blame on former SEC Chief Accountant Robert Herdman, while lightening up on outgoing SEC Chairman Harvey Pitt --- http://www.accountingweb.com/item/96854

Chairman Pitt resigned on Election Day after being widely blamed for forcing the other SEC Commissioners to vote on Mr. Webster's candidacy without knowing vital information about his background. The Commissioners later learned of a lawsuit involving actions taken by Mr. Webster as audit committee chairman of US Technologies. Calls for Chairman Pitt's resignation escalated after Mr. Webster told the media he had alerted Chairman Pitt to the lawsuit prior to his appointment.
The draft of GAO's report confirms that Mr. Webster warned Chairman Pitt of a potential problem. Chairman Pitt asked Mr. Herdman to investigate, and SEC's enforcement division told Mr. Herdman's staff of an investigation into the financial dealings of senior management at US Technologies. Even though this information was not related to Mr Webster's position on the audit committee, Mr. Herdman did pass along the information to Chairman Pitt.
Later, however, SEC's division of corporation finance told Mr. Herdman (or his staff) that BDO Seidman, US Technologies' auditor, had raised problems with the company's internal financial controls and that the auditor had been fired soon after. But Mr. Herdman did not pass along this second piece of information to Chairman Pitt. ("Pitt set to escape full blame for SEC debacle." Financial Times, December 11, 2002)
Chairman Pitt is remaining in the role of chairman until his successor can be named. Earlier this week, President Bush nominated William Donaldson, a Wall Street veteran, to chair the SEC.

"The Rise and Fall of Dennis Kozlowski," Business Week, December 23, 2002
COVER STORY --- http://www.businessweek.com/magazine/content/02_51/b3813001.htm
How did he become so unhinged by greed? A revealing look at the man behind the Tyco scandal.

With every passing month, Tyco International Ltd.'s (TYC ) Leo Dennis Kozlowski looms larger as a rogue CEO for the ages. His $6,000 shower curtain and vodka-spewing, full-size ice replica of Michelangelo's David will not be soon forgotten. At the office, too, Kozlowski's excess was legendary. He was the most prolific corporate acquirer ever, gobbling up 200 companies a year--nearly one every business day--at the height of his hyperactivity. If Wall Street saw Tyco's seventyfold increase in market cap under Kozlowski as proof of his genius, who was he to disagree? In 2001, Kozlowski proclaimed his desire to be remembered as the world's greatest business executive, as a "combination of what Jack Welch put together at GEand Warren Buffett's very practical ideas on how you go about creating return for shareholders."

Kozlowski's claims to greatness were shredded this year by his indictment on two sets of charges brought by Manhattan District Attorney Robert M. Morgenthau. The first startled in the pettiness of the greed it exposed: A mogul worth at least $500 million chisels New York City out of $1 million in sales tax due on fine art. But the second indictment, handed down on Sept. 12, shocked in the scale of corruption alleged. In essence, prosecutors accused Kozlowski and former Chief Financial Officer Mark Swartz of running a criminal enterprise within Tyco's executive suite. The two were hit with 38 felony counts for pilfering $170 million directly from the company and for pocketing an additional $430 million through tainted sales of stock. "My client believes that the charges filed against him are unfounded and unfair," says Stephen Kaufman, Kozlowski's lawyer. Swartz also pleaded not guilty. Both Kozlowski, 56, and Swartz, 42, declined to be interviewed.

The story of Dennis Kozlowski's rise and fall--told here more completely than ever before--is a tragicomedy for our times. The history of American business contains few figures who were unhinged by greed as theatrically as was Tyco's burly ex-boss. But perhaps because Kozlowski is so apt a symbol of Bubble Era excess, the question of why he did what he did has gone unanswered and, in fact, has rarely been raised in print. In hopes of completing the unmasking begun by the twin indictments, BusinessWeek spent three months researching every aspect of Kozlowski's life. What emerges is a portrait of a man who was at once more admirable and more deceitful than the debauched Roman emperor of a CEO that the world has come to know and disdain.

Continued at http://www.businessweek.com/magazine/content/02_51/b3813001.htm

"What About Enron's Lawyers," Business Week, December 23, 2002
LEGAL AFFAIRS --- http://www.businessweek.com/magazine/content/02_51/b3813093.htm
Enron's auditors and bankers have been under the spotlight. Now, Business Week reveals the attorneys' role

These are not happy days for Enron Corp.'s hired hands. The company's auditor, Arthur Andersen LLP, has been driven out of business. Its bankers, including Citigroup (C ) and J.P. Morgan Chase & Co. (JPM ), have been pilloried repeatedly, most recently in the Senate on Dec. 11.

But one group of professionals has so far escaped the inquisition: the energy giant's lawyers. They have been accused of no crimes, have paid no big fines, and are taking a hard line against critics. "There's nothing that I'm aware of that we would change," Joseph C. Dilg, managing partner of the Houston-based law firm Vinson & Elkins, told the House Energy & Commerce Committee in March. "We never saw anything at Enron that we considered illegal."

Are the lawyers as innocent as they claim? V&E and Enron's other outside law firms have taken far less heat than the company's accountants and bankers, but they played an equally important role in concocting the controversial transactions that allegedly concealed the company's true performance. Indeed, there's no way Enron's left hand could have sold so many assets to its right hand without creative input from both inside and outside counsel.

So far, this piece of the Enron drama has gone largely untold. But using recently released documents, as well as interviews with corporate insiders, BusinessWeek has assembled the most detailed picture yet of how attorneys assisted Enron's financial engineers. The lawyers not only drafted the documents that brought the company's deals to life but also wrote opinion letters that vouched for the legality of the company's acrobatic maneuvers--a little-understood piece of the puzzle that had to be completed before some of the deals could go ahead. By writing those opinion letters, attorneys blessed several transactions now being attacked as deceptive. "It takes a lot of little pieces of paper for an Enron to happen--and lawyers wrote a lot of those little pieces of paper," says Susan Koniak, a professor of legal ethics at Boston University School of Law, who is writing an analysis of the company's lawyers.

Enron is far from the only case in which lawyers helped executives accused of ripping off shareholders. But while accountants will be answering to a new independent oversight board and investment banks are facing the involuntary restructuring of their research units, lawyers are looking at only some modest new regulations that the Securities & Exchange Commission is scheduled to implement in January. Many experts question whether the proposed reforms go far enough. "It is still part of the mythology of the profession that lawyers serve as brakes on bad conduct," says New York University School of Law legal ethics expert Stephen Gillers. "What we've seen in the past 20 years is that client pressures have turned them into more of a gas pedal."

Enron's attorneys insist that they violated none of their legal, ethical, or moral obligations. Whether they worked inside or outside the company, they all mount the same defenses: that the deals they worked on were legal, they had nothing to do with the company's accounting, and they didn't have enough facts to grasp the big picture at Enron. "If you are working on a deal, you don't always see the rest of the elephant," says V&E partner Harry M. Reasoner.

Ignorance may yet prove to be a legitimate excuse for many of Enron's lawyers, if only because, in its heyday, the company handed work to more than 100 firms and employed 250 in-house attorneys. The vast majority got nowhere near the deals Enron allegedly used to conceal its bad investments.

In fact BusinessWeek has learned that a fairly small group of lawyers handled the most controversial transactions at Enron. In-house, the key players were a few attorneys assigned to Enron Global Finance (EGF)--a legal team created to assist former Chief Financial Officer Andrew S. Fastow. The aggressive CFO seemed to think of EGF's top lawyer as "[his] attorney, rather than Enron's attorney," according to a summary of an interview with associate general counsel Rex R. Rogers conducted by the special investigative committee of Enron's board of directors. Fastow declined comment through his attorney, and Rogers did not return BusinessWeek's phone calls.

Fastow rewarded favorite lawyers with juicy carrots. Former EGF general counsel Kristina Mordaunt invested $5,800 in Fastow's LJM1 partnership and saw a return of more than $1 million within months. Mordaunt's attorney did not respond to BusinessWeek's calls. Lawyers Fastow disliked were clubbed with big sticks. According to several sources, he fired Mordaunt's successor, Scott M. Sefton, and attempted to sack EGF staff lawyer Joel N. Ephross because both resisted his direction. "Andy clearly surrounded himself with people he thought would be loyal to him and whom he could influence or pressure," says a high-ranking exec who participated in many of the deals. Sefton and Ephross declined to comment.

Continued at http://www.businessweek.com/magazine/content/02_51/b3813093.htm

In the May 28, 1999 Edition of New Bookmarks, I wrote the following at http://www.trinity.edu/rjensen/book99q2.htm#052899

I just want to congratulate two of my former students ( RRRRR SSSSS, President/CEO & XXXXX YYYYY, Vice President/Operations) and who, along with another Trinity University graduate ( TTTTT UUUUU, Vice President/Software Engineering), formed an Internet solutions company (especially database installations) that is booming. Another one of my students, Brian Clarke, graduated in May and has now become the Chief Financial Officer. This company is so successful that it now leases some of the most expensive office space in the tallest building in San Antonio. Good work in this venture guys and congratulations on some new contracts from major companies like IBM! I found your server to be a bit slow, but the web site has helpful information. http://www.atension.com/main.html
(The above Atension link is now defunct.)

Subsequently, on December 16, 2002, Trinity University accounting and computer science graduate, XXXXX YYYYY, saw his picture on Page C1 of The Wall Street Journal, but he prefers it would have been for a different reason. The startup company referred to below was founded in San Antonio by XXXXX and two other Trinity University graduates ( TTTTT UUUUU, and RRRRR SSSSS).

"Aftermath of a Market Mania: Memories of Euphoria, Despair," by E.S. Browning and I. J. Dugan, The Wall Street Journal, December 16, 2002 --- http://online.wsj.com/article/0,,SB104001124869303513,00.html?mod=todays%5Fus%5Fmoneyfront%5Fhs

XXXXX YYYYY shut his office door and turned on his computer to check his stock portfolio. He threw himself on the floor, rolled around and laughed wildly.

It was late 1999. He was 23 years old. He had just sold his Texas start-up company to a dot-com, and now, on paper, had become one of the young Internet millionaires he had been reading about.

Fast forward. Dennis Jacobs, a Florida contractor, is on the phone trying to reach the head of Mr. YYYYY's company, having lost tens of thousands of dollars investing in the now-crumbling stock. When he can't get the executive on the phone, he leaves a threatening voice-mail message for which he is obliged to apologize.

What happened between that euphoria and that despair was the most wrenching bear market in stocks since the Great Depression. Close to $7 trillion has been wiped out of investors' portfolios, largely as a result of a three-year collapse in technology stocks that many investors had ridden to the top, only to lose everything. Since its peak, which followed an unprecedented run-up, the Nasdaq Composite Index has fallen 73% -- the steepest drop for any major U.S. market index since the 1930s. The Dow Jones Industrial Average is 28% off its record and the Standard & Poor's 500-stock index is off by 42%.

Not only did the boom represent all the classic signs of one of history's great manias, but it created some remarkable shifts in the way the economy and financial markets worked. Ordinary Americans took up stock investing as never before, and, often working on home computers, became the drivers of the market. Some company employees preferred stock options to a salary.

The stock market, in turn, came to dominate economic life, as soaring share prices fueled mergers and a spending boom, leaving behind a hangover of excess that will take years to work off.

[The bulk of the above article is not quoted here. It discusses the boom and panic phases of the 1990s and is an excellent summary of stock market psychology, mania, and despair.]

Mr. YYYYY got a job in a company that develops software to help other companies manage employee benefits.

He is manager of product evolution, earning about $80,000 a year

Bob Jensen's threads on the recent accounting, finance, and business scandals are at http://www.trinity.edu/rjensen/fraud.htm

Five Ways Financial Institutions Can Rebuild Public Trust, SmartPros, December 18, 2002 --- http://www.smartpros.com/x36403.xml

On the basis of the research, PricewaterhouseCoopers identified five ways which could help management of financial institutions to play a leadership role in the restoration of public trust:

1) The industry should lend its support to moves by regulators to formulate consistent international accounting principles. Consistent standards enable investors and underwriters to gain a clearer picture of an institution's performance. Financial institutions should use such standards in their own disclosure and demand their use from client and investee companies.

2) Financial institutions must rethink their own standards of disclosure, and especially non-financial disclosure. The survey showed that they remain wary of disclosing more than they are required to -- most internally available information is not revealed to investors. Within individual institutions, the gap between internal and external reporting practices needs to narrow.

3) Financial institutions and regulators must work together to develop Internet-based reporting standards. Harnessing the Internet's capability to improve the timeliness and relevance of reporting, particularly through the use of Extensible Business Reporting Language (XBRL), will make analysis of performance easier for everyone

4) Whenever financial institutions provide capital to companies, they should seek to strengthen standards at those companies

5) Financial institutions must do more to establish the appropriate checks and balances on their own top managers. If financial institutions are to hold other companies to the highest standards of governance through their capital-allocation activities, their own house must be in order

Source: "The trust challenge: how the management of financial institutions can lead the rebuilding of public confidence"
by PricewaterhouseCoopers.

"Stock-Option Frenzy: What Went Wrong?" Matt Murray, The Wall Street Journal, December 17, 2002 --- http://online.wsj.com/article/0,,SB1040087291317375553,00.html?mod=todays%5Fus%5Fmarketplace%5Fhs
Recipients' Fixation on the Share Price, Meant as Golden Carrot, Proves Costly

Stock options were once championed by consultants, professors, investors and politicians as the ideal golden carrot -- an incentive for executives and valued employees to improve corporate performance by aligning their fortunes with those of shareholders.

And that has happened -- occasionally.