Financial scandals 1

Running head: FNANCIAL SCANDALS

Financial scandals and their impact on business loyalty

Keith O. Williams

Liberty University

BUSI 472

Dr. Julia McMillan

May 6, 2009
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Abstract

The topic I proposed to write a paper on is "Financial scandals

and their impact on business loyalty". In this paper, I will

attempt to uncover lack of loyalty among such companies such as

Enron, MCI WorldCom, and Martha Stewart Living Omnimedia, Inc as

it relates to corporate finances. In today’s financial market,

top executives across the country are looking for ways to

increase their personal wealth without any concern for its

clients, shareholders, and employees. Corporate greed cause

companies millions of dollars in losses as well as unemployment

and benefits of their employees. It’s you ever wonder can

people ever just the company they work for without fear of

losses and unemployment. What does it really means to have

loyalty and trust in your company to make you feel apart of the

company and care about its success.

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Financial scandals and their impact on business loyalty

The first company we will examine is Enron, a utility

supplier located in Houston, TX. The corporation was

founded in 1985 after US Congress passed a law ordering the

deregulation of utility companies, making competition

possible and helping companies like Enron successful. Enron

was considered one of the leading electricity, natural gas

and communications giants that employed over 21,000 people

and claimed revenues of $101 billion in 2000. It was also

lauded for being an exemplary employer and to be a great

place to work. It turns out that much of that reputation

and revenue was completely fraudulent. In fact, Enron’s

accounting firm Arthur Anderson was accused of wasting

millions of dollars on unknown partnership deals that

caused Enron to file bankruptcy in 2001. Many of Enron’s

company debts and revenue was not recorded in their

financial books, misleading investors out of millions of

dollars. Stocks had dropped from $99 a share to a low $0.50

a share. The company lied about its financial position in

order to keep financial ties to their investors which began

to worry when stocks fell. The scandal compelled Congress

in 2002 to pass the Sarbanes-Oxley Act, the most sweeping

anti-fraud legislation ever, and companies are paying

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auditors and attorneys billions of dollars in fees to keep

pace with the new rules (Iwata, 2006).

One of the most tragic outcomes of the Enron debacle

was the loss of millions of dollars in retirement funds for

former Enron employees. In 2003, the Department of Labor

filed suit in Texas to attempt to recover the retirement

savings losses that Enron employees suffered due to the

blatant mismanagement of two of Enron’s main pension plans

(Iwata, 2006). Essentially, because of the poor management

of the company and the widespread fraud, Enron was rendered

virtually valueless – which left any employees who were

dependent on the value of the stock without funding for

retirement. In some cases, victims of this fraud were

already retired and were virtually wiped out.

Because more than half of the assets of Enron’s 401(k)

Savings Plan for employees consisted of Enron stock, which

is now virtually worthless, the department of labor sued on

the grounds that the employees had the right to assume

someone would advocate for a more balanced investment plan

(Iwata, 2006). Since the management of the company and the

board of directors failed to act in the best interest of

the employees, they are being held liable for the massive

losses that were incurred. Under tort law, this is

considered a blatant lack of action leading to loss.

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What does that say about corporate loyal? Companies

that engage in fraud involve employees who have benefits

under them such as profit sharing, IRA retirement, and

401k. When a company uses greed to expand their enterprise,

it hurts everyone especially the employees, the people who

work hard to foresee corporate growth. Management has an

obligation to disclose information to its employees that

affect loyalty, commitment, and production. Now the

investors and employees are skeptical about investing money

and time in corporate America due to investment frauds such

as Enron. The best way to inflict distrust is to hiding,

lying, and using deception for one’s personal gain. Once a

company sense corporate distrust, investors stay clear away

from such company. The best way to stay clear of greed and

financial fraud is to keep employees recent information and

provide accurate financial information to required parties.

Remember, what you do to others will fall back on you.

The second company we will examine is Martha Stewart

Living Omnimedia Inc., makers of everything from household

products to media production. Owner and CEO, Martha Stewart

was found guilty by the Security Exchange Commission on

inside trading. Why is this illegal? Investors made

decisions based on the performance of the company they

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invest into. If investors don’t have current information,

they can only trade stock based on what is presently known.

However, when Sam Waksal, Stewart’s friend, learned the

pharmaceutical company ImClone was denied approval to

distribute a cancer drug, Stewart sold her shares of stock

before the news hit the investors. Stewart avoided losses

of $45,673 by selling her 3,928 shares of ImClone (Huffman,

2002). Martha Stewart claimed that she was worth $750

million, and thus, this loss would have been equivalent to

approximately .006% of her total net worth, beyond

miniscule from a business perspective (Huffman, 2002). In

turn, the company went under and ImClone investors lost

millions of dollars in stock. Insider trading is only

illegal when a person bases their trade of stocks in a

public company on information that the public does not know

(Rasmussen, 2002). It is illegal to trade your own stock in

a company based on this information but it is also illegal

to give someone that information, a tip, so they can trade

their stock (Rasmussen, 2002). There were a number of

charges brought against Stewart, including, inter alia,

conspiracy to obstruct the SECs investigation, making false

statements, and perjury.

According to Wayne M. Carlin and Barry W. Rashkoverhe,

two federal researchers, the Securities and Exchange

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Commission filed securities fraud charges against Martha

Stewart and her former stockbroker, Peter Bacanovic. The

complaint, filed in federal court in Manhattan, alleges

that Stewart committed illegal insider trading when she

sold stock in a biopharmaceutical company, ImClone Systems,

Inc., on Dec. 27, 2001, after receiving an unlawful tip

from Bacanovic, at the time a broker with Merrill Lynch,

Pierce, Fenner & Smith Incorporated. The Commission further

alleges that Stewart and Bacanovic subsequently created an

alibi for Stewart's ImClone sales and concealed important

facts during SEC and criminal investigations into her

trades. In a separate action, the United States Attorney

for the Southern District of New York has obtained an

indictment charging Stewart and Bacanovic criminally for

their false statements concerning Stewart's ImClone trades.

On the ethical side of this issue, not

disclosing important information that can effect

major life decision is not only unethical, but

totally immoral. In this age, people are out for

themselves and willing to do anything to gain

success without personal regard to those who are

affected. In times of economic distress or greed,

corporate America is known to try anything

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deceptive and use that information or actions to

scam people out of wealth. If a person is in

wrongdoing, it’s our obligation and duty to help

someone return to the path of morality. The issue

of loyalty and trust is the same that of Enron. You

cannot be trustworthy if you keep information from

someone that will affect the well being of the

company. Martha Steward cannot be trust with

leadership of the company dues to deceptive

practices that cause the fall of another company.

Investors and employees’ lack a respect for

management causes low commitment and very love

production which will hurt the company financially.

The best things to do in this cause are be honest

and don’t hide anything. It proves that what you

don’t know will hurt you.

The final company we will examine is MCI

WorldCom, the world’s second largest

telecommunications company. MCI and LDDS WorldCom

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merged in 2003 as an attempt to compete with other

communication companies such as Sprint, AT&T, and

Verizon. WorldCom grew largely by aggressively acquiring

other telecommunications companies, most notably MCI

Communications. From 1999 to 2002, the MCI WorldCom (under

the direction of Scott Sullivan (CFO), David Myers

(Controller) and Buford "Buddy" Yates (Director of General

Accounting) used fraudulent accounting methods to mask its

declining earnings by painting a false picture of financial

growth and profitability to prop up the price of WorldCom’s

stock. The fraud was accomplished primarily in two ways:

The company is accused of underreporting or improperly

disclosing financial information in order to acquire new

investors to help keep the company afloat.

The company is accused of inflating revenue with false

information using undistributed account sources.

After a series of investigations, there was over $3.8

billion of fraud when auditors stockpiled $11 billion in

shady accounting errors into private accounts. WorldCom

filed for bankruptcy in July 2002, its debts dwarfing its

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$104 billion in assets. The collapse was nearly twice the

size of the previous largest bankruptcy, the 2001 failure

of Enron (Martin, 2005). MCI WorldCom filed bankruptcy in

an attempt of hiding millions of dollars in funds from

employees benefit accounts and shareholders. As a $74

billion oversight, the resulting collapse wiped out the

value of the company’s stock, destroying the pension

holdings of tens of thousands of WorldCom workers. More

than half of the company’s workers lost their jobs as well

as their pension savings. The work force in what remains of

WorldCom, now renamed MCI, is down from 101,000 to only

40,000 (Martin, 2005). To make matters worse, MCI WorldCom

CEO, Bernard Ebbers was accused of swindling the company

out of $400 millions to pay for personal debts and to cover

investment speculations of financial fraud. Furthermore,

MCI WorldCom CFO Scott Sullivan overseen the entire process

was convicted of conspiracy and fraud. It turned out that

the $11 billion in revenue was nonexistent and tried to

raise the cash to cover up the deception by cheating local

telephone companies out of hundreds of millions of dollars

in access fees (Glassman, 2003). If these charges, which

come from former WorldCom executives and three phone

companies, are true, MCI has been committing an additional

grave fraud (Glassman, 2003).

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According to Glassman, he concluded that:

The WorldCom story should have been a simple one: as corporate

scandals shatter the faith of small investors, a company that

commits massive fraud receives a massive punishment that fits

its crime.

Instead, WorldCom prospers, nurtured by regulators and

politicians who appear to worry that, if it is hobbled,

disruptions to service will occur and jobs will be lost at a

critical time for the economy. This is nonsense. Other

telecommunications companies are in a position to take

over parts of MCI's business. The fact is that MCI today is a

disruptive and dispiriting force.

I have to agree with Glassman that financial scandals such

as Enron, Martha Stewart Living Omnimedia, and MCI WorldCom

makes you wonder can we ever trust the leaders and management of

companies today to make ethnical decision that will protect

jobs, employee benefits, and the company well being. The world,

ruled by greed will hurt more people than these large

corporations could ever imagine. With the economy in the

recession, more businesses are trying to bounce back their

losses by overcharge clients additional fees and maintain

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executive lifestyles. There is no totally regard to its victims

as they rather would see them homeless while corporate

executives defrauding people out of millions of dollars just to

maintain their standard of living. Not only this is unethical,

it’s downright inhuman and these professionals will be

responsible for their actions in this life and the next. Even

though the SEC has done a great job of cracking down on

corporate deception, employees all across the country must take

desperate matters in order to test the validity of management

trust. This is to assure their well being is being protected

against shady executives.

What bothers me the most is that why Congress let MCI

WorldCom gets away with murder? Glassman asked these questions:

why is the FCC not acting? Why has the SEC given MCI such a mild

fine? Why is the General Services Administration allowing MCI to

receive government contracts? Where is Congress, which professes

to care about investor confidence? Maybe Congress needs MCI more

then its reserve? Think about it: how can someone steal from the

company, make a huge profit, and split the revenue? It would be

logical not to do and ask for help if times are hard. There are

some good Samaritans in the world. Instead, MCI is double-

dipping, allowing this fraud to take place, borrowing and

growing and grinding down its rivals by any means necessary.

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Now, the company filed Chapter 11 bankruptcy, renounce the debt

and keep the fruits of it - including tax breaks also. Something

must be done and must be done quickly. Otherwise, we will have

defunded retirement accounts, loss of wages, and hard earned

investments worthless. Actions require actions.

In conclusion, there is a question of trust from a

management team that hides behind scenes of employees that make

the difference but takes all the credit. Investors spend much

time and money and expect a decent return and accounting fraud

will cause shareholders to loose faith in their investment and

want to pull out immediately. Yet, these corporations take

investors’ hard earned investment and perform deceptive

accounting and financial practice that gains huge profits for

members of management and heavy losses for shareholders.

Employees and investment should be treated ethically and must be

inform of everything that will affect them and the company as a

whole.

Remember: what you do to one, it will happen to you.

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References

Carlin, Wayne M. and Rashkoverhe, Barry W (2003). SEC Charges

Martha Stewart, Broker Peter Bacanovic with Illegal Insider

Trading, http://www.sec.gov/news/press/2003-69.htm

Glassman, James (2003). MCI / WorldCom fraud story MCI /

WorldCom fraud story

http://www.xent.com/pipermail/fork/Week-of-Mon-

20030728/024297.html

Huffman, Drew. (2007). Martha Stewart's Insider Trading Case: A

Practical Application of Rule 2.1,

http://findarticles.com/p/articles/mi_qa3975/is_200707/ai_n

19511828/

Iwata, E. (2006, January). Enron's legacy: Scandal marked

turning point, http://

www.usatoday.com/money/industries/energy/2006-01-29-enron-

legacy-usat_x.htm.

Martin, Patricia. (2005). Ebbers found guilty in WorldCom fraud:

A case study of us corporate criminality

http://www.wsws.org/articles/2005/mar2005/ebb-m18.shtml
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Rasmussen, Hannah. (2002). The Insider Trading Scandal - What

did Martha Do? About.com,

http://economics.about.com/cs/finance/a/insider_trading.htm