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Corporate
Scandals Lead to Changes in Financial Industries |
Posted:
05.10.04
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Last week a jury in New York found Frank Quattrone, an investment
banker who first sold the stock of such companies as Amazon.com
and Netscape to the public, guilty of trying to obstruct an investigation
into the activities of his firm, Credit Suisse First Boston. His
crime? Quattrone sent out an e-mail in December 2000 urging coworkers
to "clean out" their files -- in violation of the ongoing
investigation.
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The jury's verdict comes just a few weeks after another guilty
verdict. This time it was Martha Stewart convicted of lying to
investigators who were looking into whether she illegally sold
shares of Imclone, a company owned by her friend.
In both cases, it was the cover-up, not the actual crime, that
brought the convictions. More importantly, the verdicts sent the
signal that life in corporate America may be getting a lot tougher
for those who break the rules.
 "Clearly
we are in a different world now," Georgetown University professor
Donald Langevoort told The Washington Post. "Anyone who plays
that game anymore is risking serious jail time."
Indeed, several other cases -- against Dennis Kozlowski, the
former chief executive of Tyco International, several executives
of Enron Corp. and Bernie Ebbers, the former CEO of Worldcom --
are set to go to trial and dozens of additional investigations
are underway. Allegations of wrongdoing range from using illegal
accounting tricks, stealing money from the person's own company
(one CEO bought a $6,000 shower curtain) to lying to investigators.
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The stock
market boom |
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What happened to change the fortunes of these former high-flying
CEOs and flashy investment bankers? The common thread through
all these scandals is the alleged criminal activity occurred during
the stock market boom of the 1990s.
Stock markets -- like the New York Stock Exchange and the NASDAQ
-- are where shares of stock in thousands of companies are bought
and sold. Each share represents a small percentage of ownership,
and a company can have billions of shares outstanding. Between
1983-1999, stock prices increased 16 percent a year -- their fastest
growth in more than 75 years.
All that growth and the millions of dollars it represented made
many rich and some people greedy. And there were several factors
that made it a lot easier for some to bend or break the rules
to get richer.
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Stock options |
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First, there were stock options. Stock options are agreements
between the company and its top executives that allow the executives
to buy the company's stock at prices far below what the public
pays. Companies don't pay anything to issue stock options, making
it a sort of "free money."
 In
1993, the government's stock regulating agency, the Securities
and Exchange Commission, and the nation's accounting authority,
the Financial Accounting Standards Board, tried to change the
rules to make sure companies paid for the options they were issuing.
Congress blocked their attempt and the use of stock options exploded.
Soon, many CEO salaries were mostly made up of stock options,
with more given if the company's stock price went up. This meant
that some CEOs would do anything to make their company's stock
price rise, even if they had to falsify how the company was doing.
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Banks getting
into business |
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Another factor was the repeal of the Glass-Steagall Act in 1999,
which had kept banks out of other businesses, like selling stock
or insurance. The repeal created a slew of conflicts of interest
-- like bank analysts recommending the stocks of companies that
were customers of the bank -- which would later plague those who
bought stock.
Meanwhile, the quickly growing Internet became an important way
for Americans to buy stocks -- many for the first time. By 1999,
almost half of the households in the country had some money in
the stock market, either by buying stocks on their own or through
a retirement plan where they worked. As all this new money drove
stock prices higher and higher, more and more Americans wanted
in. That made it easy for crooked executives and bankers to take
advantage of naive investors.
 In
April 2000, all this came to an end. Stock prices began to fall
very quickly as people became nervous about high prices. It became
worse when it was discovered that companies like Enron, HealthSouth,
Worldcom and others were using accounting gimmicks to make themselves
look more profitable or hide problems, like high debt. Even as
companies faltered and collapsed, the top executives at many businesses
were collecting huge salaries -- sometimes hundreds of millions
of dollars.
It was also learned that investment bankers and stock analysts
had indulged in bad behavior, such as rigging the selling of stocks
to favor investors willing to kick back money to the bank, or
falsely telling the public such stocks were good investments when
they knew they weren't.
When the smoke cleared, millions of people across the country
had lost money, several large companies had gone bankrupt, and
thousands of employees had lost their jobs.
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The Sarbanes-Oxley
Act |
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Outraged government regulators -- those people whose job it is
to oversee stock markets and companies -- began investigating
those involved and started prosecuting some of those who caused
such a scandal. And in July 2002, Congress and President Bush
created a new law, the Sarbanes-Oxley Act, that contained several
new rules designed to keep such behavior from ever harming investors
again.
 For
example, CEOs must now swear in writing that the financial reports
filed every three months with the SEC are truthful. Also, the
rules banned companies from making loans to executives, and made
it tougher for CEOs to sell their company's stock for a profit.
The law also created an accounting oversight board to supervise
corporate bookkeepers. A later settlement with ten large Wall
Street investment banks funded a new industry of independent stock
pickers, whose recommendations the government hopes will not be
as tainted as Wall Street's.
Whether all these new rules will bring Americans back into the
market is hard to tell -- the market's been going up over the
past several months and more people are again buying stocks, but
all that could change quickly, especially if any new scandals
emerge.
--
Gregg Wirth, Online NewsHour
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American schools and financial aid should be only for legal citizens of the United States. There should be no exceptions to this.
