shades of gray the fine line between honesty and criminality in corporate america
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Shades of Gray
The fine line between honesty and criminality in corporate America
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Greg Farrell
• Reporter USA TODAY– Enron– Arthur Andersen– WorldCom– HealthSouth– Cendant
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Character references
• Ken Lay
• Jeff Skilling
• Bernie Ebbers
• Richard Scrushy
• Walter Forbes
• Martha Stewart
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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
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Corporate Crooks II
• What is a crook?• Bad guys lie• Bad guys steal• Easy to recognize
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Good guys?
• Successful• Innovative• Charismatic• Media stars• White House• Davos
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What unites these men?
• Jeff Skilling, fraud at Enron
• Walter Forbes, fraud at Cendant
• Paul Bilzerian, securities fraud
• Alan Bond, investment fraud
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Harvard Business School
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White-collar crime
• It’s not “black or white”
• The world is gray
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Statistical Ethics
• Normal distribution• Pure evil?• Unadulterated good?• Most in middle
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Case studies
• Middle manager at WorldCom
• Senior manager at Enron
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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
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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.
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Cooking WorldCom’s books
• Impossible for one• Sullivan recruits four• Conspiracy is born
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Betty Vinson
• Careful bookkeeper• Married, one daughter• Family breadwinner• 1996 salary: $50,000• 2000 salary: $80,000
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Sullivan’s scheme
• Reverse accrual accounts
• Appalled, but colleague convinces her
• Threatens to resign a few days later
• Conversation in Sullivan’s office
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Sullivan’s scheme II
• Vinson comes around
• Sullivan’s stellar reputation
• Vinson’s salary tough to replace
• Finding a new job difficult, arduous
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WorldCom’s slide gets worse
• $544 million shortfall• No more accruals
accounts to raid• Desperate tactics• Capitalize line costs
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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
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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
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Planet Enron
• Most elaborate fraud in US history
• Pervasive greed• Criminal company?
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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
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Enron in the 1990s
• Total focus on stock price
• Attempts to duplicate “gas bank” strategy:– Deregulation of electricity markets– Enron Energy Services– Enron Broadband
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Enron: 1998
• Trouble maintaining 15% growth rate
• Need to buy/sell assets at quarter’s end
• Problem finding third parties
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Fastow to the rescue
• CFO forms partnership• No pesky “3rd party”• Buys lousy assets• No questions asked• Never loses money• Stole $30 million
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Other tricks
• Disguised bank loans as “sales”
• Hid California profits in “cookie jar”
• Assigned bogus values to assets– $80,000 lemonade stand
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Fraud at Enron
• Systemic
• Not just 3 or 4 people
• 16 guilty pleas
• 5 convictions
• 100 unindicted co-conspirators
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Criminal trial of Lay, Skilling
• Government alleges massive conspiracy
• Lay, Skilling accused of lying to investors
• Parade of cooperating witnesses
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Defense argument
• Enron was actually making money
• Implausibility of conspiracy
• Logic: someone would have objected
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David Delainey
• Rising star• Named head of EES• EES losses worsen• Skilling’s solution• March 2001 meeting• EES losses hidden
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Conspiracy
• No guns required
• Tacit support
• Difficult to resist
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Whistleblowers
• Sherron Watkins• Special personality• Ostracized• Demeaned by defense• Lonely role
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Conclusions
• Nobody intends to break the law
• Compliance techniques vary
• Rationalizations
• Are you willing to walk?