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					Shades of Gray
The fine line between honesty and criminality in corporate America

Greg Farrell
• Reporter USA TODAY
– Enron – Arthur Andersen – WorldCom – HealthSouth – Cendant

Character references
• • • • • • Ken Lay Jeff Skilling Bernie Ebbers Richard Scrushy Walter Forbes Martha Stewart

Corporate Crooks
• Destruction of $200 billion • Congress helped it happen
– Penalized salaries over $1 million – Underfunded the SEC – Made it more difficult for investors to sue – Allowed auditors to act as consultants

Corporate Crooks II

• • • •

What is a crook? Bad guys lie Bad guys steal Easy to recognize

Good guys?
• • • • • • Successful Innovative Charismatic Media stars White House Davos

What unites these men?
• • • • Jeff Skilling, fraud at Enron Walter Forbes, fraud at Cendant Paul Bilzerian, securities fraud Alan Bond, investment fraud

Harvard Business School

White-collar crime

• It’s not “black or white” • The world is gray

Statistical Ethics
• • • •

Normal distribution Pure evil? Unadulterated good? Most in middle

Case studies
• Middle manager at WorldCom • Senior manager at Enron

WorldCom
• • • • • Born during the breakup of AT&T Incremental growth (1984-1996) Stunning growth (1997-1999) Acquisition of MCI, $5 billion income Correlation with Internet bubble

Trouble in 2000
• • • • CEO Bernie Ebbers’ stock Sinks from $1 billion to $500 million CFO Scott Sullivan’s millions Ebbers tells Sullivan to fix numbers.

Cooking WorldCom’s books
• Impossible for one • Sullivan recruits four • Conspiracy is born

Betty Vinson
• • • • • Careful bookkeeper Married, one daughter Family breadwinner 1996 salary: $50,000 2000 salary: $80,000

Sullivan’s scheme
• • • • Reverse accrual accounts Appalled, but colleague convinces her Threatens to resign a few days later Conversation in Sullivan’s office

Sullivan’s scheme II
• • • •

Vinson comes around Sullivan’s stellar reputation Vinson’s salary tough to replace Finding a new job difficult, arduous

WorldCom’s slide gets worse
• $544 million shortfall • No more accruals accounts to raid • Desperate tactics • Capitalize line costs

Vinson’s dilemma
• Knows that capitalization of line costs is wrong • Resolves to put her resume together and seek new job • Participates in conspiracy • Does it for 3 more quarters

Meet the New Betty
• • • • • • By 2002, an innocent no more She’s part of the conspiracy What happened to “resume,” “new job”? Rationalized each step Focused on loss of $80,000 job Never saw bigger threat ahead

Planet Enron
• Most elaborate fraud in US history • Pervasive greed • Criminal company?

Brief history
• • • • • Natural gas pipeline (1985) At the mercy of gas prices 1990: creation of the “gas bank” Creation of new market Enron becomes leading innovator

Enron in the 1990s
• Total focus on stock price • Attempts to duplicate “gas bank” strategy:
– Deregulation of electricity markets – Enron Energy Services – Enron Broadband

Enron: 1998
• Trouble maintaining 15% growth rate • Need to buy/sell assets at quarter’s end • Problem finding third parties

Fastow to the rescue
• • • • • • CFO forms partnership No pesky “3rd party” Buys lousy assets No questions asked Never loses money Stole $30 million

Other tricks
• Disguised bank loans as “sales” • Hid California profits in “cookie jar” • Assigned bogus values to assets
– $80,000 lemonade stand

Fraud at Enron
• • • • • Systemic Not just 3 or 4 people 16 guilty pleas 5 convictions 100 unindicted co-conspirators

Criminal trial of Lay, Skilling
• Government alleges massive conspiracy • Lay, Skilling accused of lying to investors • Parade of cooperating witnesses

Defense argument
• Enron was actually making money • Implausibility of conspiracy • Logic: someone would have objected

David Delainey
• • • • • • Rising star Named head of EES EES losses worsen Skilling’s solution March 2001 meeting EES losses hidden

Conspiracy
• No guns required • Tacit support • Difficult to resist

Whistleblowers
• • • • • Sherron Watkins Special personality Ostracized Demeaned by defense Lonely role

Conclusions
• • • • Nobody intends to break the law Compliance techniques vary Rationalizations Are you willing to walk?


				
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posted:11/15/2009
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