Former Enron executives Kenneth L. Lay and Jeffrey K. Skilling will stand trial in Houston early next year on criminal conspiracy charges. Federal prosecutors on the Justice Department Enron Task Force have charged more than 30 people and have requested that Kenneth Lay's trial begin sooner than next year. Former finance chief Andrew Fastow and investor relations head Mark Koenig, pleaded guilty and have agreed to cooperate with government investigators.
Enron has agreed to pay the US government $47.3 million in cash, as part of the settlement regarding the company's involvement in inflating energy costs during the energy crisis.
Wall Street analysts believe that Enron's settlement would not exceed $247 million, since the company is bankrupt. The amount Enron would pay to the US government as damages settlement would come from the company’s remaining assets after it pays back all its liabilities to secured creditors. Attorney General of Washington, Rob McKenna, said that he is only partially satisfied with the settlement. Enron was accused of trading practices that caused power prices to increase as much as 100-fold during the energy crisis in the US. Enron's officials said that claims worth of $65 billion are still to be settled.
Earlier this year, the 80-year-old founder of Adelphia Communications Corp., John J. Rigas, received a 15-year prison sentence. Rigas' son, Timothy, 48, the company's former chief financial officer, was sentenced to 20 years in prison. Another Rigas son, Michael, former executive vice president for operations, was acquitted of conspiracy and wire fraud. Jurors deadlocked on 15 counts of securities fraud and two counts of bank fraud. He is scheduled for a second trial in October.
THE WALL STREET JOURNAL estimates that Adelphia investors lost $3.5 billion from the stock's high in 1999. The Rigas settled with The Securities and Exchange Commission and the Justice Department and agreed to forfeit over 95% of its collective assets--over $1.5 billion in value. According to an agreement between Adelphia's new management and the SEC and U.S. Attorney's Office, some of the money will be returned to Adelphia, to settle claims and to compensate investors who lost billions. Also in April, 2005, Adelphia's new management reached an agreement for Time Warner, Inc. and Comcast Corporation to acquire almost all of the U.S. assets of Adelphia.
Arthur Andersen and Enron
In the wake of the Enron scandal, Arthur Andersen faced the unusual situation of having its entire firm indicted on criminal charges. The CEO of the firm resigned and the lead auditor for Enron, David Duncan pleaded guilty and testified against Enron. Andersen was found guilty and fined $500,000. Andersen has stopped practice as an accounting firm in the United States but it is still facing lawsuits by creditors and Enron shareholders. It's employee base has gone from 28,000 employees to about 200 employees, mainly dealing with the many lawsuits faced by the accounting firm.
In 2002, a jury convicted the firm of obstruction of justice.
Much of the testimony from 28 witnesses focused on shredding of documents and destruction of computer records in October and November of 2001. In June of 2005, the Supreme Court overturned the criminal conviction of Arthur Andersen, ruling that the instructions issued by the federal judge presiding at Andersen's trial were too vague. The judge had instructed the jury that Arthur Andersen could be convicted even if the audit firm was acting in the belief that its actions were lawful. The case was sent back for retrial, but some court watchers don't believe the Justice Department will retry the case.
On Christmas Eve of 2002, the U.S. Department of Justice announced that it would not seek the indictment of Gary Winnick, founder and chairman of Global Crossing, a Bermuda-based company that built a 100,000-mile fiber-optic network connecting more than 200 cities in 27 countries. Winnick sold $734 million worth of stock, including $123 million in the weeks before the telecommunications company began to collapse.
Global Crossing filed for Chapter 11 protection in January 2002. In a lawsuit, investors accused Global Crossing, former officers and directors, and advisers of falsifying financial filings to hide losses. The lead plaintiffs, the Public Employees Retirement System of Ohio and the State Teachers Retirement System of Ohio, represented by Grant & Eisenhofer, claimed they lost more than $110 million. In 2005, Arthur Andersen agreed to pay $25 million to settle a lawsuit brought by investors over its role in the collapse of Global Crossing. Earlier, Citigroup agreed to settle its share in the investor lawsuit with $75 million. According to Reuters, "38 individuals, including former members of Global Crossing's board are paying $195 million. Former chairman and founder Gary Winnick is paying $19.5 million."
ImClone Systems Inc.
Sam Waksal, former CEO, was charged in 2002 with insider trading, and pleaded guilty to six counts, including bank fraud, securities fraud, conspiracy to obstruct justice, and perjury. In October 2002, Waksal pleaded guilty to a six-count indictment, including charges he tipped off his daughter, Aliza, that the Food and Drug Administration's decision to review ImClone's cancer drug Erbitux. In June 2003, Waksal was sentenced to seven years in prison. He was also required to pay $3 million in fines and $1.26 million in restitution. He began serving his sentence as a minimum-security facility in Pennsylvania in July 2003. Waksal is also banned for life from ever leading another public company.
According to BUSINESSWEEK, the drug at the center of the case, Erbitux, now approved for sale after all, had $98 million in sales in the United States in 2004.
Merrill Lynch and Co.
In 2002 NOW WITH BILL MOYERS reported extensively on the role played by stock analysts at Merrill Lynch in the financial scandals of the Internet bust. Among the most damning evidence used by New York Attorney General Eliot Spitzer were e-mails written by star Internet stock analyst Henry Blodget which praised companies to investors while denigrating them privately. (Read Blodget's e-mails.) Merrill Lynch agreed to pay a $200 million fine for issuing fraudulent research. The company also changed its payment practices, prohibiting analysts payments from being related to the firm's investment-banking work. Henry Blodget was fined $4 million and banned from the securities industry for life. The SEC is still investigating the implications of Merrill's research reports, and some investors have filed suit against the company.
In 2005, two former Merrill executives were convicted of fraud in connection with an Enron scandal. The case revolved around the paper sale of power barges. The former head of the brokerage's asset lease group, James A. Brown, was sentenced to three years and 10 months in prison and a year's probation. Daniel H. Bayly, former head of investment banking, was sentenced to 2 1/2 years' incarceration and six months' probation. Each was ordered to pay $840,000 in fines and restitution.
Former Tyco International Ltd. chief L. Dennis Kozlowski is scheduled to be sentenced next month on larceny charges. Mr. Kozlowski and former TYCO finance director Mark Swartz were found guilty of stealing $150 million in unauthorized compensation and gaining from $400 million in share transactions carried out under false pretenses.
In 2003, Tyco International Ltd. filed a $400 million lawsuit against Mark Swartz, claiming he looted the conglomerate for his personal gain.
Tyco has an entirely new executive board and has restructured its debt. Tyco has asked a federal judge to dismiss securities fraud claims against the company, arguing that the troubled conglomerate was the victim of deceit by former senior executives, according to court papers. According to THE FINANCIAL TIMES, shares in TYCO "fell nearly 10 per cent as its new management issued their second profits warning in three months and analysts rushed to downgrade investor recommendations."
Tyco Fraud InfoCenter
In August 2005, the U.S. Attorney's Office in Colorado filed a motion to freeze class-action suits against former executives at Qwest Communications International saying that information could emerge from the suits that could compromise the criminal investigation by the Securities and Exchange Commission. In February 2003, the Justice Department handed down a 12-count criminal indictment against three former Qwest employees: former CFO Grant Graham, former senior vice president Thomas Hall, former assistant controller Bryan Treadway, and former vice president John Walker. All four have pleaded innocent to artificially inflating Qwest revenues to meet Wall Street targets. Penatlies could be on the order of 5 to 10 years in prison and $250,000 to $1 million in fines. In addition, the SEC has filed civil charges against eight former employees.
In early October 2003, the SEC announced a $25,000 settlement with a former sales director at Qwest. That executive, Loren Pfau was accused of making secret deals in order to up the company's revenue numbers. According to THE DENVER BUSINESS JOURNAL, "Robin Szeliga, former chief financial officer for Qwest and Gregory Casey, former executive vice president of wholesale business at Qwest, have settled charges and agreed to cooperate with the SEC's probe. Qwest agreed to pay the SEC $250 million last year to settle accounting fraud allegations, but the agency continues to pursue cases against individual executives."
U.S. Department of Justice release on Qwest indictments
The WALL STREET JOURNAL calls the WorldCom scandal "the biggest accounting scam ever." The fraud at WorldCom ultimately topped $11 billion and led to the country's biggest bankruptcy filing, in July 2002. Nearly 17,000 employees lost their jobs as a result of the scheme to bury expenses and inflate revenue, according to a probation report.
On July 13, 2005, WorldCom former Chief Executive Bernard Ebbers was sentenced to 25 years in prison for his role in orchestrating the biggest corporate fraud in the nation's history. The Ashburn company has since emerged from bankruptcy protection and renamed itself MCI Inc.
In 2003, Ebbers agreed to pay $5.5 million cash and to hand over his Clinton, Miss., mansion and other assets worth as much as $40 million to resolve claims filed by WorldCom shareholders who lost billions of dollars when the company collapsed.
In August 2005, former WorldCom accountant Betty Vinson was sentenced to five months in prison and five months house arrest. She had pleaded guilty to one count of securities fraud and one count of conspiracy and had testified at Ebbers' trial. Other former WorldCom staffers pleaded guilty and testified at the trial. Controller David Myers, director of general accounting Buford Yates Jr., and director of legal entity accounting Troy Norman will also be sentenced in August 2005.
WorldCom filed for bankruptcy in July 2002 and the company emerged from Chapter 11 bankruptcy in 2004 with a new name, MCI. The SEC accepted a fine from WorldCom of $500 million in cash and $250 million in stock.
Sources: THE NEW YORK TIMES; FORBES; THE WASHINGTON POST; THE WALL STREET JOURNAL; BANK & LENDER LIABILITY LITIGATION REPORTER; CNN; FINANCIAL TIMES; MONEY; DENVER BUSINESS JOURNAL