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Table of Contents Chapter 1: Corporate Scandals 1 Introduction 1 The Need to Restore Trust and Integrity 3 Root Causes of the Current Crisis 6 Remedies to the Current Crisis 7 Corruption and Greed on Wall Street 9 Overview of the Text 10 Chapter 2: A Short History of Business Scandals 17 The Mississippi Company Bubble of France 19 The South Sea Bubble of England 21 Age of the Railways 24 Railroad Scandals 26 Railway Stocks in the U.S. & the Stock Market Crash of 1873 28 Jay Cooke--America's First Investment Banker 28 The Ponzi Pyramid Scheme of Finance 30 The Martin Act and State Blue Sky Laws 32 The Boom Era of the 1920s 33 A Respected Executive & the Middle West Utilities Holding Company 34 >From Popularity to Obscurity--A Hard Fall 35 A Fall from Grace with a Rebound 36 Government Efforts to Address the Stock Market Crash-- Glass-Steagall 38 More Scandals--McKesson & Robbins Company 42 Savings & Loan Scandals 43 Final Thoughts 45 Chapter 3: Corporate Malfeasance: Fraud, Regulatory Laxity and Theft 53 Major American Corporations Lose Their Way 54 Enron 54 Tyco 63 WorldCom 67 Global Crossing 70 Qwest 71 Adelphia 73 ImClone 74 Scandals Appear in Europe 77 Missing Oil Reserves At Shell 77 Royal Ahold 78 Parmalat 79 Europe Readies Itself for Future Scandals 81 International Reactions 82 Conclusion 84 Chapter 4: Addressing Corporate Scandals: The Sarbanes-Oxley Act as a Panacea? 89 The Public Company Accounting Oversight Board (PCAOB) 90 CEO/CFO Reporting Certification 90 Disgorgement of CEO and CFO Compensation and Profits 91 Ban on Personal Loans to Executive Officers and Directors 92 Dramatically Accelerated Reporting of Trades by Insiders 92 Prohibition on Insider Trades During Pension Fund Blackout Periods 92 New Audit Committee Standards 93 HealthSouth: An Early Test of the Sarbanes-Oxley Act 94 Sarbanes-Oxley Already Paying Dividends 97 Demise of Author Andersen 99 The Plight of Other Accounting Firms 101 Freddie Mac Suppresses Profits 103 Macro Effects of Corporate Malfeasance 105 Economic Recovery Held Hostage 105 Assessment and Final Thoughts 106 Chapter 5: Scandal Spreads to Wall Street 111 Pressures Mount in Washington 112 SEC Chairman, Harvey Pitt, at Center of Controversy 112 Bush's Reaction: Status Quo? 113 Wall Street Tackled by New York Attorney General 115 The Martin Act Addresses Wall Street Wrongdoing 115 Eliot Spitzer--The Public's Hero 116 Reforms Started: The Global Settlement for Investment Banks 117 Penalties, Disgorgement, Funds for Independent Research, and Investor Education 120 Summary of the Enforcement Actions 120 Celebrity Investment Analysts Investigated 122 Henry Blodget's Resignation: E-mails Can Come Back to Haunt You! 122 Mary Meeker Remains Unindicted 123 Jack Grubman: Permanently Barred from the Securities Industry 124 Frank Quattrone: The Master of Technology IPOs 126 Summary of Global Settlement 127 The New York Stock Exchange (NYSE): Another Self-Regulation Failure 129 Richard Grasso: From Hero to Goat 129 Carl McCall's Role 137 John Reed Begins Work 138 Violations of "Trade Through Rules" 140 Final Thoughts and Conclusion 141 Chapter 6: Mutual Funds Scandals: More than a Few Bad Apples 145 Mutual Fund "Late Trading" and "Market Timing" Scandals 146 The First Domino: Canary Capital Partners 148 Bank of America--Nations Funds Family 149 Putnam Investments 151 The Strong Funds 152 Janus Capital Group 155 Massachusetts Financial Services Company (MFS) 157 Alliance Capital Management 158 Other Prominent Funds Involved 159 Mutual Fund Fees Questioned 163 Illegal Sales Practices--Directed Brokerage Businesses 165 Fund Trustees As Chihuahuas 167 Fidelity's Johnson Argues Against Proposed Board Reform 168 Commission Bundling and Soft Dollar Payments 169 Malfeasance at Insurance Companies 169 Funds Withdrawal and the Effect on Funds Size 170 SEC Reform 171 Final Thoughts 173 Chapter 7: Executive Perversion of Financial Management 177 Agency Theory 178 The Agency Problem in Full Bloom 180 Era of LBOs and Junk Bonds 181 Options: The Major By-Product of the LBO Movement 181 The Economic Boom of the 1990s 183 Dividend Conventions Violated 183 The Fundamentals of Share Repurchase Strategies 184 Buybacks Substituted For Dividends 185 The Inappropriate Use of Share Buybacks 186 Anything But Chump Change 187 At the End of the Day, What Happened? 189 A Trillion Plus $ Heist 190 What About Agency Theory? 192 Concluding Thoughts and Analysis 193 Chapter 8: Market System and Societal Institutions Called into Question 195 Institutions Establish the Rules of the Game 196 The Role of Organizations 198 The Market Economy as an Institution 199 Public Education is Necessary to Avoid "Atrophied Personalities" 201 Transaction Costs and Property Rights Give Rise to Institutions 202 Non-Market Institutions that Counter the Negative Effects of the Market 204 The Family as an Institution 205 The State as an Indispensable Institution 206 The Nation and Cultural Institutions 207 Professional Associations Let Us Down 207 Choices Devoid of Meaning 208 Organization Theory: Incentives Versus Leadership 210 Spill-Over Effects of the Market 211 Executive Compensation: A Simple Disgraceful Process 212 Paying for Performance as a Joke 213 CEO Compensation Excesses: How Much is Enough? 215 Transparency as a Panacea 216 Final Thoughts and Analysis 217 Chapter 9: Virtuousness: Medicine for Business Ethics 221 Reflections on the Virtuous Life--Early Philosophies 223 The Study of Virtue in History 224 Adam Smith Relates Morality to the Invisible Hand 228 And Confucius Says! 233 Developing Character Through Virtuous Behavior 239 Blindsided By Greed 241 Education and Business Ethics 243 Final Thoughts and Analysis 246 Appendix: Caux Round Table 249 Listing of Virtues 257 Chapter 10: Corporate Scandals: Reflections 263 The Six Key Questions 264 Who Was the Central Villain? 274 Notes 277 Bibliography 293 Index 303 List of Tables and Exhibits Chapter 3 Figure 3-1: Dow Jones 1999-2004 Industrial Average 54 Table 3-1: Enron's Political Contacts 57 Table 3-2: Enron Timeline 60 Table 3-3: Tyco Scandal Timeline 64 Table 3-4: Main Players in WorldCom Fraud 70 Table 3-5: Company Legal and Ethical Violations 76 Table 3-6: Parmalat Timeline 80 Table 3-7: Prominent European Company Ethical Violations 82 Chapter 5 Table 5-1: Specific Settlement Payments 119 Table 5-2: Investment Bank Analysts 128 Table 5-3: Investment Bank Ethical Violations 128 Table 5-4: Richard Grasso's Compensation 131 Chapter 6 Table 6-1: SEC Policy Initiatives 171 Table 6-2: SEC Policy Initiatives (continued) 172 Chapter 7 Exhibit 7-1: S&P 500 Dividend Yield Since 1871 184 Exhibit 7-2: Share Repurchases Compared to Dividends 186 Exhibit 7-3: S&P 500 Share Repurchases and Equity Issuance 188 Exhibit 7-4: Market Value of U.S. Corporate Equities and Foreign Depository Receipts Owned by U.S. Residents 191 Chapter 9 Table 9-1: Universal Symmetry--The Golden Rule Across Cultures 226 Table 9-2: Virtues that Support Business Transactions 232 Table 9-3: Via Classification of Sample Virtues 241 Table 9-4: The Seven Capital Sins vs. The Seven Capital Virtues 242 LIST OF ABBREVIATIONS AND ACRONYMS .com commercial .edu education .gov government .org organization AA Arthur Andersen AA, LLP Arthur Andersen, Limited Partnership AFL-CIO American Federation of Labor - Congress of Industrial Organizations AMG Affiliated Managers Group AT&T American Telephone and Telegraph B.C. before Christ BAC Bank of America Corporation BBC British Broadcasting Company CEO Chief Executive Officer CESR Committee of European Securities Regulators CFO Chief Financial Officer CIT Commercial Investment Trust CNBC Cable National Broadcasting Company CNN Cable News Network COO Chief Operating Officer CPA Certified Public Accountant CSFB Credit Suisse First Boston LLC DOJ Department of Justice eps earnings per share EU European Union FASB Financial Accounting Standards Board FBI Federal Bureau of Investigations FDA Federal Drug Administration FDIC Federal Deposit Insurance Corporation GAAP Generally Accepted Accounting Principles GDP Gross Domestic Product GLBA Gramm-Leach-Bliley Act GSE Government Sponsored Enterprise HBS Harvard Business School ICI Investment Company Institute IOU I Owe You IPO Initial Public Offerings IRS Internal Revenue Service JEDI Joint Energy Development Investments KKR Kravis, Kohlberg, and Roberts KPMG Klynveld Peat Marwick Goerdeler LBO Leverage Buyout MBA Masters of Business Administration MCI Micowave Communications Incorporated MFS Massachusetts Financial Services NASD National Association of Securities Dealers NBC National Broadcasting Company NCB National City Bank NCC National City Company NPR Northern Pacific Railroad NPV Net Present Value NYAG New York Attorney General NYSE New York Stock Exchange OFHEO Office of Federal Housing Enterprises Oversight P/BV Price Divided by Book Value P/E Price Divided by Earnings per share PCAOB Public Company Accounting Oversight Board PIMCO Pacific Investment Management Company PwC Price-Waterhouse-Coopers S&Ls Savings and Loans S&P Standard and Poor's SEC Securities and Exchange Commission SLF Sun Life Financial Inc. SOA Sarbanes-Oxley Act SOP Standard Operating Procedure SPE Special Purpose Entity SRO Self-Regulated Organization SRS Share Repurchase Strategy SSB Salomon Smith Barney Inc. UBS AG Union Bank of Switzerland (Zurich) UBS UBS Warburg LLC UK United Kingdom US United States USA United States of America
Library of Congress Subject Headings for this publication:
Commercial crimes -- United States.
Corporations -- Corrupt practices -- United States.