Corporate White Collar Crime

[mirror]

Very often we are treated to the latest violent crime incident in our communities on the corporate TV News at nite. What seems to be kept hush hush by our corporate media is the corporate white collar crime. Apart from a few big sensational cases such as the one mentioned below, we rarely hear about corporate white collar crime:

Fade to black for Conrad

But for Black, the Hanna Mining episode was in the far-distant past. He was eager to exile himself from Bob Rae's "socialist" Ontario. Thanks to Radler's acquisitiveness, most of HI's titles now were in the U.S. There was prestige in a NYSE listing. There was little hope of raising more equity capital in London after the fiasco of Black's initial public offering in Telegraph PLC, shares of which soon plunged when Black reneged on a pre-offering vow not to slash the Telegraph's cover price in a price war launched by Rupert Murdoch's London Times. (The Telegraph's British white-shoe underwriter, Cazenove & Co., fired its client as a result.) And even less hope of tapping Canada's equity markets, given the sorry experience of investors in Black's impenetrable maze of holding companies. As Claude Lamoureux, president of the huge Ontario Teachers' Pension Plan Board told the New York Times last year, "None of us had shares in [HI]. We all knew Conrad Black."

[shoop]

Reading that article points to three big cases with very long sentences.

Bernard Ebbers (Edmonton-born yikes) CEO of Worldcom sentenced to 25 years.

John Rigas President of Adelphia sentenced to 15 years.

Dennis Kozlowski CEO of TYCO facing 15 to 30 years.

These guys are all getting what they deserve.

An educated guess would be that good old Conrad is facing a minimum ten years.

The left may call it what they will, but this high-profile prosecutions have brought a lot of corporate execs into line. As they should.

[August1991]

There are several thousand public companies listed on the NYSE and the NASDAQ, and these firms employ thousands of executives. These scandals (Enron and World.com) have been spread out over several years. People who invested in these firms did so voluntarily.

Has anyone gone to jail for the HRDC scandal in Canada? The gun registry fiasco? It appears some will go to jail from the sponsorship scandal but if I'm not mistaken, none will have penalties anywhere close to 10 years. Needless to say, the money lost in this case was not taken from us voluntarily.

[theloniusfleabag]

Dear August1991,

People who invested in these firms did so voluntarily.

They were deceived by false reports to think it was a good (or at least safe) investment. That is the real crime, not the actual losing of the money.

Has anyone gone to jail for the HRDC scandal in Canada? The gun registry fiasco? It appears some will go to jail from the sponsorship scandal but if I'm not mistaken, none will have penalties anywhere close to 10 years. Needless to say, the money lost in this case was not taken from us voluntarily

Someone (or several people) should be threatened with 'dancing on the end of a rope' for the gun registry and the ad scandal. (OK, bit extreme) Canada is way to lax when it comes to any type of crime, the US is over-zealous. Gotta find a happy medium.

[Toro]

I didn't own a share in Hollinger, and I told everyone to stay away, from both the bonds and the stocks. Back in 1990 or 1991, Black listed the Telegraph on the the London Bourse, raising millions from shareholders. A month afterwards, he slashed the price of a daily newspaper from 70p to 30p as he and Murdoch engaged in a price war. He totally screwed anyone who bought stock as the price fell 60% on the news. He treated shareholders with disdain, and now he's probably going to prison for it.

[mirror]

Toro.......do you know anything about what really happened with Bre-X? I don't mean who carried out the salting as apparently it was Michael de Guzman and his Filipino buddies, but who actually was behind the fraud. At one time I thought Felderhof might have been involved in it but I have now have my doubts even about that. I just think he was incompetent.

One thing I am almost positive about is that de Guzman did not jump voluntarily from that helicopter. He was either pushed out or he is still alive. and the fact that one of his 4 wives said she received a money order from Brazil for $25,000. this year, makes me think he is still alive, although she has not provided any evidence to back up her claims.

What's your take?

[mirror]

One thing I was hoping to discuss with this thread is the compensation to the these corporate exercutive jerks who get rewarded for bad behaviour. It is no wonder the business community has little respect outside its own little private clubs.

CEOs' reigns of error have big payoffs

An obvious recent example is that of John Hunkin, CEO of CIBC until a few weeks ago, whose bank last week agreed to a $2.5 billion (U.S.) class-action settlement with Enron Corp. investors relating to alleged deals during the Hunkin era by which the ill-fated Enron was able to disguise the true state of its precarious finances.

The CIBC settlement exceeds those made by the huge New York financial houses J.P. Morgan Chase & Co. and Citigroup Inc., leading one Bay Street analyst to the unavoidable conclusion CIBC might be the "most culpable" of Enron's enablers.

The result of the recent CIBC payout has been to almost cripple the bank, given that the payment is equal to more than three-quarters of its excess common equity. Which means that anticipated dividend hikes and share buybacks are now likely out of the question. And with so diminished a capital base to cope with the next cyclical spate of bad loans, CIBC is a probable early candidate to lose its independence in a merger with another bank or one of Canada's Big Three insurers.

It's not an attractive legacy, but Hunkin nonetheless walks away from CIBC with about $67 million (Canadian) in salary, bonuses, stock and other benefits from his eventful tenure — an absurd sum he's not likely to surrender, despite calls last week for him to return some of his pay to shareholders who have lost about $3.5 billion in market cap since the announcement of the CIBC payout to Enron claimants. After all, a U.S. judge recently rejected a shareholder attempt to punish directors of Walt Disney Co. for lavishing $140 million (U.S.) in severance on Michael Ovitz, fired after only 14 months as president of the company.

Indefensible go-away payouts for failed CEOs are now the norm. Indeed, given the high turnover rate among corporate CEOs in the past decade, such payouts are written into a new CEO's contract as a form of danger pay, the generosity of which reflects the initial warm glow of promise exhibited by the incoming CEO before he or she first arrives on the premises.

Some other recent examples:

Carly Fiorina, paid $42 million (U.S.) on being fired from the CEO post at Hewlett-Packard Co. earlier this year.

Philip Purcell, paid $114 million (U.S.) a few weeks ago to walk away from the civil war he triggered among colleagues at investment house Morgan Stanley Co.

Dick Grasso, loaded down with a $140 million (U.S.) severance package in 2003 after presiding over a crisis in corporate governance at the New York Stock Exchange.

Doug Ivestor, briefly and ineptly CEO at Coca-Cola Co., cushioned by a $116 million (U.S.) send-off after his forced departure in 2000.

Reflecting on this curious interpretation of the "pay for performance" dogma, it's hard to disagree with New York Times columnist Nicholas Kristof's observation this week that "Corporate America has nurtured a cult of chief executives, hailing them as geniuses and then excusing their misconduct and megalomania."

If only CEO failures were merely excused. They are instead rewarded by boards that would prefer to honour an overly generous employment contract than try to recover at least a portion of the company's ill-spent CEO compensation — an exercise that would expose the directors to their own role in recruiting the wrong person for the job and then failing to abort a CEO's reign of error until much damage had been done.

In each instance of stupendous payoffs for CEOs who have fallen far short of initial expectations, the focus of outrage among shareholder activists and media commentators tends, naturally enough, to be the recipient of the unearned largesse.

But in each case it's the board that has failed. It's the directors — with their adherence to cheerful send-offs of malfunctioning CEOs — who are responsible for the demoralizing effect the reward-for-failure syndrome has on the rank and file. And for perpetuating a corporate culture in which CEOs, unlike their leadership counterparts elsewhere in society, are not held accountable for their folly in the only manner to which most of us can relate — by thinning their wallets.

[Toro]

Toro.......do you know anything about what really happened with Bre-X? I don't mean who carried out the salting as apparently it was Michael de Guzman and his Filipino buddies, but who actually was behind the fraud. At one time I thought Felderhof might have been involved in it but I have now have my doubts even about that. I just think he was incompetent.

One thing I am almost positive about is that de Guzman did not jump voluntarily from that helicopter. He was either pushed out or he is still alive. and the fact that one of his 4 wives said she received a money order from Brazil for $25,000. this year, makes me think he is still alive, although she has not provided any evidence to back up her claims.

What's your take?

<{POST_SNAPBACK}>

I honestly have no idea. I think that Felderhof living in the Cayman Islands and never coming home tells you something.

[mirror]

I agree that Felderhof certainly didn't score any Brownie points for staying away from Canada for many years until this year. He wouldn't even return to Canada for the Bre-X Board meeting when Bre-X received the devastating news that there was no commercial gold on their Indonesian property at Busang.

That was my initial impression too, but I am thinking now he was just more of a coward than anything else.

It seems like Brx-X was a fraud from the very beginning. It is amazing that so many were taken in by this giant fraud, the biggest the mining industry has ever known, I believe. Quite a tragedy for many people including the founder and CEO of the company.

[Toro]

I agree that Felderhof certainly didn't score any Brownie points for staying away from Canada for many years until this year. He wouldn't even return to Canada for the Bre-X Board meeting when Bre-X received the devastating news that there was no commercial gold on their Indonesian property at Busang.

That was my initial impression too, but I am thinking now he was just more of a coward than anything else.

It seems like Brx-X was a fraud from the very beginning. It is amazing that so many were taken in by this giant fraud, the biggest the mining industry has ever known, I believe. Quite a tragedy for many people including the founder and CEO of the company.

<{POST_SNAPBACK}>

I believe that charges have been filed against Felderhof

[mirror]

Well, Felderhof is on trial for insider trading in Toronto, which has been going on for years. There is also a class action suit winding its way through the courts in Texarcana, Texas, which is scheduled to go to trial finally next year. When

Bre-X ininially collapsed however, the RCMP were involved and then suddenly they dropped their investigation without announcing any reason for it. Very, very strange!

[theloniusfleabag]

Dear mirror,

The past head (and I do mean 'passed') of Bre-X, Mr. Walsh, used to be a regular (during the scandal) at the bar of which I was kitchen manager. (The entire staff showed up one afternoon because of a bomb threat...our restaurant&bar was 2 blocks from Bre-X's head office) He used to rant about being 'hung out to dry', and how it was unconscionable how the media was also after his son. Felderhof, evidently, might have been the guiltiest party, and left them all 'high & dry'.

[August1991]

Back in 1990 or 1991, Black listed the Telegraph on the the London Bourse, raising millions from shareholders. A month afterwards, he slashed the price of a daily newspaper from 70p to 30p as he and Murdoch engaged in a price war. He totally screwed anyone who bought stock as the price fell 60% on the news. He treated shareholders with disdain, and now he's probably going to prison for it.

Black's attitude is that if he made $1 million, shareholders should be happy to get $10,000 - it's better than nothing.

People who invested in these firms did so voluntarily.

They were deceived by false reports to think it was a good (or at least safe) investment. That is the real crime, not the actual losing of the money.

If someone holds up a bank and gets caught, I can see the logic of going to jail. But if someone sends out a fraudulent prospectus that "guarantees" a high return, whose at fault if it turns out to be a scam? The two situations are completely different.

Financial markets are all about risk, and risk comes in many forms. Whether it's Bre-X, Hollinger, Enron, World.com or any other firm, investors go in with their eyes wide open. Information is what it is and claims are what they are. It is misleading to believe that the SEC or the OSC is capable of providing any kind of serious regulation.

Most people do not actively buy or sell shares. Calls to toughen up corporate governance regulations are demagoguic populism, supported by an army of lawyers and accountants who stand to get a piece of the action.

With that said, Bre-X is quite a story.

[mirror]

Dear mirror,

The past head (and I do mean 'passed') of Bre-X, Mr. Walsh, used to be a regular (during the scandal) at the bar of which I was kitchen manager. (The entire staff showed up one afternoon because of a bomb threat...our restaurant&bar was 2 blocks from Bre-X's head office) He used to rant about being 'hung out to dry', and how it was unconscionable how the media was also after his son. Felderhof, evidently, might have been the guiltiest party, and left them all 'high & dry'.

<{POST_SNAPBACK}>

Did you also know the Bre-X VP Steve McNaulty? At least I think he was a VP. He was testifying in Toronto last week at the Federhof insider trading trail and had some interesting things to say.

[Toro]

Black's attitude is that if he made $1 million, shareholders should be happy to get $10,000 - it's better than nothing.

Not when you paid $20,000 for the shares! Oh man, August, he sandbagged shareholders! The price of the stock never got back to the initial price before it was de-listed. I work in financial markets and have participated in many of these deals, and I don't believe for a second that Black didn't know he was going to cut the price of his paper before the offering, especially since the Times cut its price before the offering. The stock of Hollinger International was dirt cheap compared to the other US newspaper companies because nobody trusted Black. And rightfully so.

[Toro]

If someone holds up a bank and gets caught, I can see the logic of going to jail.  But if someone sends out a fraudulent prospectus that "guarantees" a high return, whose at fault if it turns out to be a scam?  The two situations are completely different.

But they are making a false claim. As an investor, I rely on the information provided by the corporation to be truthful and honest. You are correct that I must be sceptical of what management tells me, but that's why we have laws which require managements to be truthful and honest. This dissemination of information increases trust for investors, which is enormously important in the functioning of a financial market.

Financial markets are all about risk, and risk comes in many forms. Whether it's Bre-X, Hollinger, Enron, World.com or any other firm, investors go in with their eyes wide open.  Information is what it is and claims are what they are. 

I totally agree that there is risk in financial markets, but when I'm putting down a significant amount of capital, I rely on audited financial statements to make that decision. In every annual filing, there is a statement from the auditors. And if the auditors say they cannot vouch for the numbers, I absolutely will not buy the stock. Full-stop. If a corporation is using false numbers, that is fraud, and managements should go to prison for it. Otherwise, what's the point in even having fraud laws since you could make the argument about every other product besides financial services?

Most people do not actively buy or sell shares.

Annual turnover on the Nasdaq is over 100%. The average money manager turns over his portfolio at around 100%. That ain't long-term investing.

Calls to toughen up corporate governance regulations are demagoguic populism, supported by an army of lawyers and accountants who stand to get a piece of the action.

I work for an organization that is larger than Ontario Teachers or the Caisse. We are actively pushing to increase corporate governance because it is in our interests to do so.

[August1991]

As an investor, I rely on the information provided by the corporation to be truthful and honest. You are correct that I must be sceptical of what management tells me, but that's why we have laws which require managements to be truthful and honest.

If you believe that a "law" can make people tell the truth, then you are living in a different universe than the one I know.

I totally agree that there is risk in financial markets, but when I'm putting down a significant amount of capital, I rely on audited financial statements to make that decision. In every annual filing, there is a statement from the auditors. And if the auditors say they cannot vouch for the numbers, I absolutely will not buy the stock.

This makes more sense to me - an audited statement.

Look, don't get me wrong. I'm not against establishing rules or guidelines.

I'm merely pointing out that there's a risk something is fraudulent, and information often can narrow that risk down. It is in the interest of a firm's managers, and auditors, to be honest. They usually stand to earn far more in the long run by being honest.

Are the managers competent, is it a fly-by-night operation, will the new technology really deliver? These are all standard questions posed by analysts.

The SEC and OSC provide more information but if 9-11 showed anything, it is that government bureaucrats are often the last to know anything of importance.

Sending corporate managers to jail is counterproductive. This will just make contracts more complex, and otherwise good deals won't occur. The cost is greater than the benefit.

[mirror]

I'm sure Bre-X, Enron, Worldcom all had audited statements, didn't they? They would have had to being public companies, n'est pas?.

I remember once working for a British company and we were undergoing an audit. The auditors found some descrepancies and brought them to the attention of management. Management told the auditors in no uncertain terms that if they wished to keep them as a client they would leave the financial stements as is. The auditors did what they were told, so even audited statements are not a total guarantee that the info you are receiving from the company is accurate.

August

How can you seriously suggest that white collar crime not be punished? You're putting us on, right?

[August1991]

How can you seriously suggest that white collar crime not be punished? You're putting us on, right?

It depends what kind of white collar crime you're talking about.

There is a fundamental difference between taking money at the point of a gun and taking money with a promise of future riches.

It is in the interest of corporate managers not to steal from shareholders - if they do steal, they will soon discover that the market will punish them swiftly, and the potential for long-term profit lost.

Unfortunately, there are corporate managers who know there are no potential, long-term profits and merely want to take the money and run.

So, it is up to the honest corporate managers to distinguish themselves from the dishonest ones, and for investors to figure out who is really telling the truth. My point is that getting the SEC and OSC mixed up in this "figuring out" task, and threatening jail time to CEOs, won't help at all. In fact, it will just make the task more difficult - and impose extra costs.

Financial markets are specifically designed to deal with information and risk, and they deal with both much more efficiently than our judicial system or bureaucracies. Again, please don't misunderstand me. We are talking about unsecured equity markets without explicit obligations. This is not breach of contract.

[Toro]

If you believe that a "law" can make people tell the truth, then you are living in a different universe than the one I know.

Well you could make that argument against any law or punishment then. The fact that a law doesn't stop criminals, any criminals, from committing a crime doesn't invalidate the law.

And yes, I certainly do think it is more likely to change behavior. If your choices are $300 million and the risk of 20 months in jail or $300 million and the risk of 20 years in jail, then it certainly is going to effect the behavior of some individuals.

I'm merely pointing out that there's a risk something is fraudulent, and information often can narrow that risk down.  It is in the interest of a firm's managers, and auditors, to be honest.  They usually stand to earn far more in the long run by being honest.

Its also in the interests of management to goose the stock up so they can exercise their options and dump their stock on the market. Listen, I've had CEOs that you probably have heard of look me straight in the eye and outright lie about their company. And they all made hundreds of millions of dollars through options. This is a problem, which I'm sure you're aware of, called the agency problem. Managements act in their own best interests, which aren't always in shareholders' best interests.

Sending corporate managers to jail is counterproductive.  This will just make contracts more complex, and otherwise good deals won't occur.  The cost is greater than the benefit.

I totally disagree. The cost of fraud to shareholders in the 1990s alone has run into the hundreds of billions. Its hard to think that the costs of greater prison time and stricter disclosure laws would be more.

There will always be bad people but good deals will occur if people are honest, full stop. The laws are hardly onerous and its already tough enough to convict guys who almost certainly committed fraud, i.e. Richard Scrushy and Walter Forbes.

Besides, if you send the poor black kid who stole $300 for the local corner store to prison, then you can send the rich white guy who stole $300 million from the market to prison.

[mirror]

Geologist feared dead in gold mine scam is still alive, claims wife

The wife of a missing Filipino geologist involved in one of the biggest scams in mining history says he is alive and has twice sent her money since vanishing eight years ago.

Michael de Guzman's Indonesian wife told The Straits Times correspondent in Jakarta, John McBeth, that her husband phoned their Jakarta home in April 1997 - six weeks after he allegedly jumped to his death from a helicopter in remote East Kalimantan as the Bre-X scandal unfolded.

Genie de Guzman, breaking her silence for the first time since the scandal, said their elderly maid nearly dropped the telephone when she heard the geologist's familiar voice.

This really is incredible. The guy who was responsible for the actual salting of the gold, who reportedly jumped out of a helecopter in Indonesia, but whose body was too mangled by wild boars to properly identify, and whose body was supposed cremated, is apparently alive, and has at least twice sent money to one of his wives.