This was supposed to be the year that corporate America and Wall Street cleaned up their respective acts and restored public confidence and trust. Corporate lawbreakers from Enron and Global Crossing were headed for justice, and sweeping reform by Congress was supposed to move the parade of fresh financial scandals off the front page.
But it didn’t turn out that way. If anything, 2003 was a banner year for financial scams, as a massive mutual fund trading scandal reached into the pocketbooks and retirement accounts of some 95 million Americans. Outrage, from watching others getting rich by breaking the rules, turned to anger, as small investors learned that the gains reaped by insiders and trading pros were coming directly out of their own portfolios. Worse, regulators at the SEC knew about the problem for years and did little to curb the practice.
So far, the scandal has forced the ouster of some of the mutual fund industry's long-time chiefs, including Lawrence Lasser, chief executive of Putnam Investments , Strong Mutual Funds board chairman, Richard S. Strong , and Gary Pilgrim and Harold Baxter, the founders of Pilgrim Baxter & Associates. Former Bank of America broker Theodore Sihpol III faces felony larceny and securities fraud charges . Three former top executives of Security Trust, were charged with grand larceny, falsifying business records and securities fraud . The Phoenix-based company processes mutual fund trades for pension plans and retirement systems. Others are expected to face criminal charges.
Investors looking to flee fund fraud had few places to turn. For one thing, as the full scope of the fraud unfolded, the list of funds involved in the scam continued to grow. And as long as fresh subpoenas were still going out, investors had no way of knowing which funds were free of abusive trading practices.
Mutual fund insiders weren’t the only traders pocketing someone else's money. A group of 47 foreign-currency traders bilked millions from big-name banks and small investors alike, say prosecutors.Traders at J.P. Morgan Chase and UBS Warburg were among those arrested after investigators found 123 rigged trades totaling $650,000 in just a few months
Meanwhile, in the boardroom, lapses in “corporate governance” – with top managers cooking the books and otherwise swindling shareholders – were supposed to taper off after Congress passed the sweeping Sarbanes-Oxley bill last year. Though the law requires new levels of disclosures and safeguards, it apparently was no panacea.
Investors were stunned by the disclosure that New York Stock Exchange Chairman Richard Grasso, himself a vocal proponent of corporate governance reform, was in line for an outsized $187.5 million pay package this year. Despite his ouster by the NYSE board , he managed to hang on to $140 million of that paycheck -- so far. Some current board members reportedly want Grasso to pay back some of that money . His successor, John Reed, dismissed NYSE directors, set up a separate regulatory board to police members, and named Goldman Sachs alumnus John Thain as NYSE president . But the two must now defend the exchange against a lawsuit arguing that the NYSE’s storied “open outcry” system of trading — where people, not computers, match trades — has allowed exchange members to line their pockets at the expense of individual investors.
Newspaper magnate Lord Conrad Black made headlines of his own, recently stepping down as CEO of Hollinger Intl. after disclosures that he and other company officials collected $32 million in unauthorized or undisclosed payments from 1999 to 2001. Hollinger, the publisher of the Chicago Sun-Times and newspapers in Britain and Israel, also said in a regulatory filing that it overstated profits by $17 million over two years . Black remains chairman and controlling shareholder of the company.
Raiding the corporate piggy bank was the preferred get-richer-quick scheme for Rite Aid CEO Martin L. Grass, who pleaded guilty in June to variety of charges, including conspiracy to defraud the drug store chain and its shareholders by inflating profit by $1.6 billion in the late 1990s. Grass agreed to serve up to eight years in prison. He and the chain’s former general counsel, Franklin Brown, also were accused of masterminding an elaborate cover-up.
Government contracts for Halliburton in Iraq proved lucrative -– a little too lucrative, according to a Pentagon investigation. The Defense Department this month found that the energy services giant, formerly run by Vice President Richard Cheney, overcharged U.S. taxpayers by some $60 million to supply gasoline in Iraq.
As the mortgage market boomed, Freddie Mac came under scrutiny by federal regulators. The mortgage finance company released an independent report in July that said company workers had created trades to inflate earnings. Earlier this month, Freddie Mac settled the case for $125 million, but federal regulators are seeking additional penalties.
Next year's court calendar is already filling up. Enron CFO Andy Fastow will have his day in court in April, more than two years after the company’s collapse. Fastow has pleaded not guilty to 98 counts of fraud, insider trading, money laundering and falsifying accounting records as part of what prosecutors say was a Byzantine scheme to line his pockets and hide billions in Enron debt. Fastow’s trial is scheduled to begin in Houston in April, but he’s trying to get the case moved because he figures everyone in Houston is so mad at him they won’t give him a fair hearing. Former Enron CEO Jeffrey Skilling and former chairman Kenneth Lay have not been charged -- yet. But a court appointed examiner last month found that they were responsible for the Houston-based company's collapse. The 1,134-page report, which relied on a 19-month investigation that cost more than $85 million, said that if the two executives didn't know the company was cooking the books, they should have.
In those trials already underway, much of the testimony was duller than watching paint dry. But the trial of former Tyco International Chairman Dennis Kozlowski -– charged with raiding the corporate piggy bank of $600 million -– provided some comic relief. The trial’s jurors – along with cable television viewers -- got a glimpse into the lifestyle of the rich and infamous with the release of home video a $2 million toga party that Kozlowski threw for his wife. (Fortunately for Kozlowski, dancing badly is not a criminal offense.) Kozlowski’s upbeat demeanor on tape stood in stark contrast to his grim-faced public appearances entering and leaving the courtroom, where he’s claimed innocence and is fighting the charges.
ImClone Systems founder and one-time Martha Stewart squire Sam Waksal checked into a federal prison in Pennsylvania in July to begin his 7-year stay. Waksal will also pay $4.3 million in fines and taxes for his insider trading conviction after he admitted tipping off his daughter to dump ImClone shares in January 2002, just before the stock plunged.
Ms. Stewart will have her day in court in January to defend against her own charges related to insider trading. Her legal troubles have begun to take a toll on her company, Martha Stewart Living Omnimedia Inc., which swung to a loss in the third quarter . Things have gotten so bad that the domestic diva had to cancel her annual Christmas party because she's too busy preparing for her trial to prepare canapes for the neighbors.
And star investment banker Frank Quattrone also made it through the year without going to jail. Quattrone made millions touting tech stocks during the bubble, and prosecutors say he did so by helping to dole out moonshot initial public offerings of tech companies. A hung jury wasn’t convinced that he obstructed justice with an e-mail to his subordinates to "clean up" their e-mail boxes. Prosecutors will get another shot when the case is re-tried in March.
But while the courts were busy, the wheels of justice turned slowly. As prosecutors uncover fraud, many have vowed to recover at least some of the proceeds to repay investors who were bilked. So far, the biggest pot recovered came from the settlement over bogus stocks research. But though the SEC is making progress, investors who lost money haven't yet seen a dime. And there's still no word on how these restitution claims will be handled -- or how much money investors can hope to recover.
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