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Library Index Crime & Justice White-Collar Crime - A Definition, How Many Crimes?, White-collar Crime Arrests, White-collar Crime Offenders And Victims

White-Collar Crime - Falsifying Corporate Data

enron fraud company executives andersen billion kozlowski arthur

The Securities and Exchange Commission (SEC) reported that falsifying corporate data, especially on financial statements, increased in the 1990s. The falsified reports included statements inflating sales, hiding ownership of the corporation, and embezzlement. In July 2003 President George W. Bush created the Corporate Fraud Task Force to oversee investigation and prosecution of crimes involving corporate fraud. The collapse of the Enron corporation was one of the most glaring examples of corporate crime and falsification of corporate data in recent history. Enron was founded in 1985 in Houston as an oil pipeline company. As electrical power markets were deregulated in the late-1990s, Enron expanded and became an energy broker trading in electricity and other energy commodities. In effect, Enron became the middleman between power suppliers and power consumers. However, instead of simply brokering energy deals, Enron devised increasingly complex contracts with buyers and sellers that allowed Enron to profit from the difference in the selling price and the buying price of commodities such as electricity. In order to service these contracts, which were becoming increasingly speculative due to the instability of unregulated electricity prices, Enron executives created a number of so-called "partnerships"in effect, "paper" companies whose sole function was to hide debt and make Enron appear to be much more profitable than it actually was. On December 2, 2001, Enron filed for bankruptcy protection, listing some $13.1 billion in liabilities and $24.7 billion in assets$38 billion less than the assets listed only two months earlier. As a result, thousands of Enron employees lost their jobs. Perhaps worse, many Enron employeeswho had been encouraged by company executives to invest monies from their 401k retirement plans in Enron stockhad their retirement savings reduced to almost nothing as a result of the precipitous decline in value of Enron stock. The stock dropped from $34 dollars a share on

October 16, 2001, to pennies per share as of December 2, 2001. Most chilling, Enron executives, who themselves reaped millions in profits from Enron stock, barred employees from cashing in their stock in late October when it still had some value. According to internal emails and other inter-office communications, warnings were given to Enron executives and to its accounting firm, Arthur Andersen, that Enron was heading for financial disaster as early as a year before Enron declared bankruptcy. The beginning of the end occurred on October 16, 2001, when Enron announced a $638 billion loss for the third quarter. As a result, the value of Enron's stockholders' equity was reduced by $1.2 billion. On November 8, 2001, Enron announced that it had overstated its earnings for the past four years by as much as $585 million. It also owed some $3 billion in obligationsto be paid in company stockto various partnerships Enron had created to offset its rising debt. By November 28, 2001, Enron's debt instruments were downgraded to junk bond status, making it impossible for Enron to forestall its collapse by borrowing more money to service its debt. In the wake of Enron's collapse, some 10 committees in the U.S. Senate and House of Representatives began to investigate whether Enron defrauded investors by deliberately concealing financial information. The shredding of financial and interoffice documents by both Enron and its accounting firm, Arthur Andersen, was also under investigation. Meanwhile, numerous lawsuits were filed against Enron, Arthur Andersen, and former Enron executives including former Chairman Kenneth L. Lay and former CEO, Jeffrey Skilling. Former Enron Vice Chairman, Clifford Baxter, was found shot to death in his car on January 15, 2002, in an apparent suicide. News reports linked Baxter's death to his despondency over his role in the Enron scandal. Enron treasurer Ben Glisan, Jr., was convicted on conspiracy charges to commit wire and securities fraud. He was sentenced to five years in prison on September 10, 2003. Jeffrey Skilling turned himself in to authorities on February 19, 2004 to face nearly three dozen criminal charges. On June 15, 2002, a New York jury found accounting firm Arthur Andersen guilty of obstructing justice in connection with the Enron collapse. After a six-week trial and 10 days of jury deliberations, Arthur Andersen was convicted of destroying Enron documents during an ongoing federal investigation of the company's accounting

practices. During the trial, executives of Arthur Andersen testified that the documents were destroyed as the result of customary housekeeping duties, not as a means to prevent federal investigators from seeing them. As a result of the verdict, Andersen faced a fine of $500,000 and a term of probation of up to five years. In the aftermath of the Enron scandal, the 89-year-old accounting firm laid off some 7,000 employees and lost more than 650 of its 2,300 clients. Other recent examples of alleged falsification of corporate data include the filing for bankruptcy in January 2002 of Global Crossing, a telecommunications company. In February 2002 the Securities and Exchange Commission (SEC) opened an investigation into Global Crossing and its auditoragain, the accounting firm of Arthur Andersenfor questionable accounting practices. L. Dennis Kozlowski, the former chief executive of Tyco International Ltd., was indicted in June 2002 by a New York grand jury on charges of evading more than $1 million in sales taxes on at least six paintings valued at some $13 million. According to the indictment, Kozlowski allegedly directed New York gallery employees to ship empty cartons to the Tyco corporate headquarters in New Hampshire, where Tyco employees were instructed to sign for the "shipments." The paintings, New York's case claims, eventually ended up in Kozlowski's Manhattan apartment for his own personal use. Kozlowski is accused of trying to evade the New York City taxes that would have been owed on paintings purchased by someone in-state (paintings purchased from out-of-state are not subject to these taxes). On June 26, 2002, the Manhattan district attorney added a charge of evidence-tampering to the other charges against Kozlowski, claiming that he removed a shipping invoice from a crate of documents before it was sent to the district attorney's office. All told, Kozlowski faced 12 felony charges and one misdemeanor charge. Kozlowski's trial ended April 3, 2004 in a mistrial. In July 2002 John Rigas, his two sons, and two other executives of the Adelphia Communications Corporation, one of the nation's largest cable television companies, were charged with wire fraud, bank fraud, and securities fraud for failing to disclose billions of dollars worth of company debt. Their deception defrauded investors, creditors, and the general public by making them believe the company was in better financial health than it was. The deception ran from 1999 to May 2002.

On November 4, 2003, Richard Scrushy, former CEO of HealthSouth, the nation's largest provider of outpatient surgery, rehabilitative healthcare services, and diagnostic imaging, surrendered to FBI agents. He faced an 85-count indictment for allegedly inflating company earnings by some $2.7 billion and falsifying financial statements to hide the fraud. He also was charged with taking some $267 million in company funds for himself. Scrushy is one of 16 HealthSouth executives under indictment for fraud. According to Fortune Magazine (March 18, 2002), between 1992 and 2001, the Securities and Exchange Commission (SEC) filed criminal charges in 609 cases involving stock fraud or other corporate crime. Of the 609 referrals, U.S. attorneys prosecuted 187 defendants. Of those, 147 defendants were found guilty and 87 went to jail or prison. From 1997 to 2000 the SEC filed some 3,000 civil cases. Of those, 39.1 percent involved securities offerings violations, followed by 16.3 percent for insider trading, 12.2 percent for stock manipulation, 11.5 percent for financial disclosure violations, and 3.1 percent for fraud against consumers. The remaining civil cases brought by the SEC were either for contempt or for other causes of action.
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