The government’s Corporate Fraud Task Force celebrated its 5th anniversary today by announcing some very scary figures: since its inception on July 9, 2002 it has convicted 1,236 executives, including 214 chief executive officers and presidents; 129 vice presidents, 53 chief financial officers;23 corporate counsels or attorneys of various frauds and criminal activities. In the year 2006 alone, 98 years after the FBI’s formation, the Bureau investigated 490 corporate fraud cases resulting in 171 indictments, 124 convictions, $14 million dollars in fines, and $62 million dollars in seizures. “But I think the number that would resonate the most with the victims of these frauds would be this one: $1.2 billion dollars in restitutions, ” said FBI Deputy Director John Pistole in a speech recognizing the group’s efforts. Chaired by US Deputy Attorney General Paul J. McNulty, the Task Force includes senior Department of Justice officials, seven U.S. Attorneys, the heads of the Departments of Treasury and Labor, Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Energy Regulatory Commission, Federal Communications Commission, United States Postal Inspection Service, and the Department of Housing and Urban Development’s Office of Federal Housing Enterprise Oversight. Unfortunately the tech industry is well represented in the task force’s Hall of Shame: —
· Enterasys: Eight former officers of Enterasys including the chairman and the chief financial officer, have pleaded guilty or have been found guilty at trial of charges stemming from a scheme to artificially inflate revenue to increase, or maintain, the price of Enterasys stock. The fraud caused Enterasys to overstate its revenue by over $11 million in the quarter ending Sept. 1, 2001. The fraud and its public disclosure resulted in a loss to shareholders of about $1.3 billion. As a result, Enterasys Chief Financial Officer Robert Gagalis was sentenced to 11 and a half years in prison. Bruce Kay, formerly Enterasys’s Senior Vice President of Finance, was sentenced to nine and a half years in prison. Robert Barber, a former Enterasys business development executive, was sentenced to eight years in prison and fined$25,000. Hor Chong (David) Boey, former finance executive in Enterasys’s Asia Pacific division, was sentenced to three years in prison, US Department of Justice stated in a release.
· WorldCom: The former WorldCom Bernard Ebbers CEO was convicted on charges of conspiracy, securities fraud, and making false statements in SEC filings, and was sentenced to 25 years’ incarceration, the DOJ said
· Qwest: The former CEO of Qwest Joseph Naccio, was convicted on insider-trading charges stemming from his sale of more than $100 million in Qwest stock while in possession of material, non-public information regarding Qwest’s financial health. A former CFO pleaded guilty to insider trading. The CEO will be sentenced on July 27,2007.
· Adelphia: Following a four-month trial, the former CEO and CFO of Adelphia were convicted of fraud charges arising from their participation in a complex financial-statement fraud and embezzlement scheme that defrauded Adelphia’s shareholders and creditors of billions of dollars. The former CEO and CFO were sentenced to 15 and 20 years in prison, respectively. Forfeitures netted over $715 million for distribution to victims.
· Homestore: Eleven executives and employees of Homestore.com an Internet company, were convicted for their roles in a complex revenue inflation scheme. Homestore fraudulently paid itself millions of dollars in bogus “round trip deals” to meet quarterly revenue expectations. The defendants were convicted of conspiracy, insider trading, wire fraud, and other securities violations. The former CEO was found guilty, sentenced to 15 years in prison, and ordered to pay $13 million in fines and restitution.
· Network Associates: The former CFO of Network Associate was convicted by a jury on securities fraud and related charges stemming from a revenue recognition scheme in which Network Associates’ revenue was overstated by more than $470 million.
· Monster: The former general counsel of recruitment services giant MonsterWorldwide, pleaded guilty in connection with a scheme to fraudulently backdate millions of dollars’ worth of employee stock option grants by creating the appearance that the options had been granted on dates when Monster’s stock price had been at a periodic low point.
· Comverse: The former CFO of Comverse pleaded guilty to fraud charges arising from the backdating of option grants and granting of option grants to fictitious employees at Comverse from 1998 to 2006. The former general counsel also was convicted of participating in the backdating scheme. The former CEO Kobi Alexander was arrested in Namibia in September 2006. The US is currently seeking his extradition.
Of course that’s not to forget the granddaddy of them all, Enron where criminal charges were brought against 36 defendants, including 27 former Enron Corporation executives. Eighteen of those charged pleaded guilty or were found guilty after trial, including Enron’s former chief executive officer, who was sentenced to 292 months in prison. The guilty verdicts against the former chairman/CEO in two cases were dismissed by abatement following his death. The Task Force seized over $100 million in ill-gotten gains and the Department of Justice worked jointly with the Securities and Exchange Commission to obtain orders directing the recovery of more than $450 million for the victims of the Enron frauds, the DOJ said.
It is also worth noting that on the same day the task force was celebrating its successes, it suffered one of its worst rebukes. A federal judge tossed out indictments against 13 former KPMG executives in the government’s largest criminal tax-fraud case ever, citing “intolerable” prosecutorial abuses that deprived the officials of their constitutional right to a defense, according to a Washington Post story.
The decision, by U.S. District Judge Lewis A. Kaplan, is a strong rebuke of federal prosecutors who exerted intense pressure on the giant accounting firm to stop paying legal bills for employees who refused to cooperate with the investigation. The sanction, which Kaplan called “drastic,” averts a trial focused on whether the former KPMG executives knowingly helped wealthy clients avoid $2.5 billion in tax liabilities by selling them unlawful tax shelters. “There are limits on the permissible actions of even the best prosecutors,” Kaplan wrote. “The responsibility for the dismissal of this indictment . . . lies with the government,” the Post reported.
In a related news story, executive stock options many times lead to increased company financial fraud. A study released last week says companies whose management incentives consisting mainly of stock options strongly increase the likelihood of financial shenanigans. The authors examined financial restatements prompted by accounting irregularities identified by the U.S. Government Accountability Office (GAO). The GAO identified 919 such restatements at 845 companies between January 1997 and June 2002. According to the GAO, these particular restatements resulted from “aggressive accounting practices, misuse of facts, oversight or misinterpretation of accounting rules, and fraud. The GAO said: “ This number represents a “significant portion” (10 percent) of publicly traded companies. The restatement trend has also shifted toward larger companies, as the median market capitalization of restating companies increased from $500 million in 1997 to $2 billion in 2002.”
