KOZLOWSKI
AP
Former Tyco Internatonal CEO L. Dennis Kozlowski stands between toga-clad women in a frame copied from the videotapes shown to jurors at his trial in New York Tuesday, Oct. 28, 2003. The highly-edited tape was made at the birthday party Kozlowski held for his wife in Sardinia at an estimated cost of $2 million.
By John W. Schoen Senior producer
msnbc.com
updated 12/23/2003 4:58:17 PM ET 2003-12-23T21:58:17

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.

SPITZER TESTIFIES ON MUTUAL FUND ABUSES
Kevin Lamarque  /  Reuters file
New York Attorney General Eliot Spitzer testifies before a Senate committee investigating abuses in the mutual fund industry in November.
So New York Attorney General Eliot Spitzer stepped in, during what was already a busy year of attacking financial fraud. Fresh from a  $1.4 billion settlement over bogus stock research churned out by ten of Wall Street’s biggest firms, the state prosecutor turned his sights to the flagrant mutual fund practice known as “late trading”  – a scam Spitzer likened to “betting on a horse race after the horses have crossed the finish line.” More than a dozen firms have now either 'fessed up to the practice and/or fired employees. Spitzer’s office continues to pursue fresh leads and sift through gigabytes of emails trying to get to the bottom of the pile.

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.

BOEING CEO PHIL CONDIT
Elaine Thompson  /  AP file
Boeing Co. chairman Phil Condit resigned unexpectedly Dec. 1, only days after the huge aerospace manufacturer fired two other Boeing officials for an alleged ethics breach.
Questionable, unethical – and even outright illegal – behavior extended beyond the boardroom.  Boeing CEO Phil Condit resigned  after it was learned that the company offered a job to a defense department official who was involved in awarding a $18 billion contract for Air Force refueling tankers. Boeing was already in the Pentagon dog house; in May, the Justice Department launched criminal and civil investigations into whether Boeing gathered sensitive Lockheed documents in the late 1990s while bidding to make the rockets used to launch U.S. government satellites. Boeing may have to pay civil damages in that case.

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.

SCRUSHY DURING CONGRESSIONAL HEARING
Larry Downing  /  Reuters file
In November, the U.S. government brought criminal charges against former HealthSouth Corp. CEO Richard Scrushy. Scrushy, who sold three-quarters of his HealthSouth stock last year, is already facing a civil complaint of insider trading and fraud by the Securities and Exchange Commission.
Health care has long been a bountiful trough for corporate swindlers, and the industry grabbed its share of headlines. HealthSouth’s former CEO, Richard Scrushy , was indicted in November on 85 counts including conspiracy, wire fraud, mail fraud, securities fraud and money laundering and charged with directing an accounting scam that overstated HealthSouth earnings by $2.7 billion since 1996 to meet Wall Street forecasts. Scrushy says he’s innocent, and his attorneys challenged the Sarbanes-Oxley law that is being used for the first time against him.

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.

BERNIE EBBERS
Dennis Cook  /  AP
Former WorldCom Chief Executive Officer Bernard Ebbers invoked his Fifth Amendment right not to testify at a Congressional hearing investigating the accounting irregularities at the telecommunications giant.
Others accused of financial wrongdoing claimed legal victory -- at least for now. Bernie Ebbers, the former CEO of WorldCom, got some good news last month when the   Oklahoma attorney general’s office dropped criminal charges  after the state failed to meet a deadline to produce evidence. (WorldCom admitted to $9 billion in accounting errors on Ebbers' watch, but he has denied any wrongdoing.) Prosecutors say they will re-file the charges, blaming a scheduling conflict with the case of Ebbers' sidekick, former WorldCom Chief Financial Officer Scott Sullivan. (That trial beings in February.)  Ebbers remains a fixture in his hometown of Brookhaven, Miss., where a reporter recently caught up with him mowing the lawn at a local motel.

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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