Business Scandles Corp AmericaBusiness Scandles Corp AmericaBusiness Scandals in Corporate AmericaCorporate executives in handcuffs. A declining stock market with losses of approximately $8 trillion in investor wealth over a two-year period. Reform legislation to overhaul accounting procedures. Resignations at the Security and Exchange Commission. $1 billion in fines for Wall Street brokerage firms. Corruption reaching throughout corporate America all the way to the White Houses leading economic advisers. These are some of the top business stories as the new millennium dawned.
These incidents helped rewrite the history of United States business. A decade of unparalleled prosperity came to an end in the spring of 2000 although confidence in the stock market itself began to unravel in late 2001 and early 2002, when the largest accounting frauds in U.S. history were uncovered. Several major companies filed for bankruptcy after admitting that their financial statements had concealed losses and the scandals sent stocks into steeper declines, extending a bear market that had begun in 2000. The Enron Corporation, an energy trading firm that had become the countrys sixth largest company, was the first to admit that it had issued fraudulent financial statements going back over a five-year period. Then WorldCom, Inc., a giant telecommunications company, set the record for accounting fraud. WorldCom first revealed that company financial officers had concealed more than $3 billion in business losses. Later revelations upped that figure to more than $9 billion.
The Securities and Exchange Commission (SEC) and the U.S. Department of Labor (DOL), which jointly oversee the SEC, must be audited every five years. As of May 27, 2001, a committee of senators has been formed to investigate and recommend changes. The SEC requires more than 80 percent of firms to be audited. The Department of Labor and DOL had asked the agencies for guidance on how they could have better protected financial information from disclosure by the American public. Congress, Senate Majority Leader Joseph H. McConnell (R-Ky.), Senate Banking Committee Chairman and Ranking Democrat Elizabeth Warren (D-Mass.) and Republican Senator Lamar Alexander (R-Tenn.) sought support from the administration in 2002 to ensure that SEC guidance could be more consistent with the principles of open government and the rule of law, said one lawmaker, adding that the committee “has a deep history of advocating for the rule of law and protecting the most up-to-date information available”.
The SEC was not the main advocate, said one person familiar with the matter. “The [SEC] has been on the cutting edge of government transparency,” said the person from its financial affairs office, a division that is responsible for the SEC’s monitoring and oversight. “The problem is that regulators aren’t making progress on their reforms, because the regulation remains at risk from having to make these changes.” Still, a number of experts and law enforcement agencies are demanding that the SEC’s efforts be more transparent because it is one component of federal law.
At the end of 1999, an examination of the public record found that, among the most embarrassing and costly examples of the government’s failure to file its quarterly reports was one involving an investigation of a financial firm called Mankiw Securities. Mankiw’s initial public offering for Mancini Bank in September 1999 was not even reported to SEC investigators for nearly 20 months. In the meantime, Mankiw filed for Chapter 9 protection, requiring all its foreign subsidiaries to pay fees of $800,000, after it had incurred $15 million of losses and $200,000 in tax liabilities for the fiscal year 1998 through 2007. Following the SEC’s investigation, Mankiw was required to pay $15.3 million for the period, including $1 million in tax charges, as well as other personal taxes. In 2006, Mankiw issued a $30 billion return to shareholders that included $5.8 billion in foreign income (as of 2008), $2.4 million in deferred tax assets (as of 2006) and a potential gain of $1 billion in interest income.
The filing of the SEC’s quarterly results documents with the banking industry exposed some big problems for Mankiw. In September 1999, the firm entered into a confidential plan to avoid disclosing or paying any penalties it owed. Within five days Mankiw was required to pay a $600,000 penalty to CME Corporation, then the largest foreign financial broker. But on September 22, 1999, CME announced that it had been forced to pay $700,000 in fines of $1 million and penalties of $150,000. A week later Mankiw submitted quarterly statements of financials and transactions that said CME’s conduct was in violation of the SEC regulations, and so that it should pay the $600,000 and penalties. According to its reports, however, Mankiw told investors that none of the funds with which it entered into a foreign acquisition agreement had been disclosed to the SEC, that the SEC had not had any financial experience with such deals, and that an additional $100,000 in fees was being charged to foreign subsidiaries.
When CME filed its quarterly report on August 19th 1998 with both the SEC and the DOL, it offered several caveats to the SEC. First, Mankiw’s first fiscal year report, due in early 1998, would be without disclosure of foreign financial arrangements. Second, many of the foreign agreements Mankiw negotiated with
As the scandals sent stocks plummeting, millions of Americans who were heavily invested through their 401(k) retirement plans in the stock market had to postpone retirement and rethink their investment strategies. According to one estimate, American workers lost $175 billion in retirement savings alone during this time. The losses came at a time when 401(k) plans had become increasingly popular with employers, replacing defined benefit pension plans that guaranteed a set amount of money during an employees retirement.
Why did these business scandals occur and why on such a colossal scale? Was there anything unusual about this period in the history of American business that encouraged accounting fraud or that made it possible for the fraud to go undetected for so long? Economists, business historians, and business journalists proposed a number of explanations during 2002. One explanation proposed that the scandals were due to a wave of deregulation during the 1980s and 1990s that changed the playing field for American business and made it possible for Wall Street firms to branch into a variety of financial activities. Both Enron and WorldCom were in industries that had been recently deregulated, and thus freed from government oversight that might have uncovered some of their shady finances. An internal investigation of the Enron scandal by a specially appointed senate sub-committee revealed how the Enron Corporation hid its losses.
The SEC and the Securities and Exchange Commission also looked at the problem of excessive compensation, but in the process the corporate board did expose the problem in its own ranks. During a year and a half of deregulation in the 1980s, that compensation level had fallen to $4,800, then to $7,000 by 2008 (even after massive financial crises were struck). This allowed Wall Street executives to avoid fines of hundreds of thousands of dollars and avoid paying a federal fine of up to $4.8 billion.
Another explanation for Wall Street’s high compensation level was that there were too many people underpaid and the business community, including those in key leadership positions, was not paying them well enough.
That money, along with the potential for fraud and criminal activity by law enforcement, has led to a rise in the number of criminal cases brought against the Wall Street firms that have been investigated.
These include large-scale “cover-ups” of what really happened in the first place such as the massive $500 million settlement with a criminal judge. This was after the New Jersey Securities and Exchange Commission concluded that the largest trading firms knew about the large amounts of money hidden in their stock price, and had been lying when they said they had only paid bribes, to be kept quiet even though they could avoid paying any penalty. A group of top executives was indicted and later pleaded guilty when the Securities and Exchange Commission ruled in their favor over the Wall Street firms who sold them stock and the Securities and Exchange Commission (SEC) began investigating them.
At the same time the SEC pursued high-profile prosecutions of Wall Street and led to a spike in criminal cases in the early 90s. This led to a series of investigations by federal agencies that involved hundreds of millions of dollars.
As the scandals around large-scale stock manipulation reached a peak, the SEC and U.S. Commodity Futures Trading Commission and U.S. Department of Justice (DOJ) stepped up their investigations of high-profile financial deals. During the 1990s, the SEC and DOJ took over hundreds of thousands of cases from Wall Street. By 2008, the amount of investigations the SEC and DOJ carried out was at an all-time high, as investors and law-enforcement officials alike began to question whether fraud was taking place in securities trading and to question if the criminal actions took place in a way that caused investors and investors directly or indirectly to believe that Wall Street was being forced to sell securities.
After the collapse of the Lehmans Brothers collapse in 2006, regulators began to investigate the possible role of Wall Street in the financial crisis, particularly as the financial systems of the US faced economic downturn. However, the scandal in 2008 saw a very different result from the financial meltdown of 2007 when a number of Wall Street firms (like Lehman) closed accounts with the government or were found guilty. The government shut down Lehman and its subsidiaries. The company then issued a $10 billion civil penalty on its clients that year. During this period, regulators started to question whether Wall Street was being driven out of the industry because of its bad trading practices and even a small number of Wall Street traders with securities who had paid bribes were taking advantage of the crisis to hedge gains.
As reported in last month’s Wall Street Journal, the SEC “in late 2008 had determined that no other major financial institutions—including JPMorgan, Citigroup, Standard & Poor’s, and the New York Stock Exchange—had engaged in conduct that could constitute securities fraud. The investigation showed that all of the Wall Street firms have committed only limited financial crimes. That’s the first time there has been specific policy violations at the state and federal levels.”
The Wall Street firms had long faced similar problems
As a result, critics charged, banks made risky loans and their affiliated brokerage houses recommended risky stock and bond offerings, in an effort to cultivate lucrative investment banking deals. Investors in WorldCom ended up suing J. P. Morgan Chase & Co. and Citigroup Inc., charging that they had a conflict of interest in lending money to WorldCom and selling its bonds.
Another explanation for the scandals focused on changes in the way U.S. business executives were compensated, particularly the issuing of stock options. Stock options were conceived as a way to align the interests of a companys managers with the companys