Corporate scandals and their consequences

Merck. The pharmaceutical firm agreed to pay $671 million to settle claims that it overcharged
Medicaid programs for four drugs, including Vioxx and Zocor, and to resolve allegations of
improper marketing to doctors. Drug companies are required to report to the government the
lowest price for its product to ensure that Medicaid programs get the benefit of the same
discount. Merck, however, hid the steep discounts it gave to hospitals by reporting higher prices
to the government. In addition, Merck gave money and perks to doctors and other health-care
professionals to entice them to prescribe Merck drugs.

Milberg Weiss Bershad & Schulman. Former partner William Lerach was sentenced to two
years in federal prison and fined $250,000 for his role in a kickback scheme involving class-
action lawsuits against some of the nation’s largest corporations. Also sentenced were Seymour
Lazar (six months home detention, two years’ probation, $600,000 fine), Steven Schulman
(forfeit of $1.8 million and a $250,000 fine), and David Bershad, who pled guilty to conspiracy
and agreed to cooperate with the government. A trial is still pending for cofounder Melvyn
Weiss, who pleaded not guilty to several charges.

Brocade Communications Systems. CEO Gregory Reyes was sentenced to 21 months in

prison and a $15 million fine for orchestrating a scheme to tamper with financial records of
stock options the company offered. Reyes became the first executive to go on trial over stock-
options backdating. So far, about 200 companies have been targeted for the practice by the
Justice Department and Securities and Exchange Commission, and many have had to restate
their finances, erasing billions of dollars in previously reported profits. Firms under
investigation include Altera, Apple Computer, Applied Micro Circuits, Asyst Technologies,
CNET Networks, Dell, Equinix, Foundry Networks, Intuit, KB Homes, Linear Technology,
Marvell Technology Group, Maxim Integrated Products, Openwave Systems, Power
Integrations, Redback Networks, RSA Security, UnitedHealth Group, VeriSign, and Zoran. In
2007, the SEC filed charges against former Apple chief financial officer Fred Andersonand
former general counsel Nancy Heinen. Anderson settled for a civil penalty of $150,000 and the
return of $3.5 million. Charges against Heinen are pending.

AIG/Berkshire Hathaway. The federal trial has begun for four former executives of Berkshire
Hathaway’s General Re Corp. (Ronald Ferguson, chief executive officer; Elizabeth Monrad,
chief financial officer; Robert Graham, a senior vice president and assistant general counsel;
and Christopher Garand, a senior vice president) and Christian Milton, AIG’s vice president of
reinsurance. The individuals are charged with participating in a scheme to manipulate AIG’s
financial statements to make it appear as if the firm increased its loss reserves by about $500
million in 2000 and 2001, pacifying analysts and investors and artificially boosting the
company’s stock price. The trial could shed light on what Berkshire Hathaway’s chairman
Warren Buffet and AIG’s former chairman and chief executive Maurice “Hank” Greenberg
may have known about the transactions. Both have denied any knowledge or wrongdoing.
Ferguson, Monrad, Milton, and Graham each face up to 230 years in prison and a fine of up to
$46 million. Garand faces up to 160 years in prison and a fine of up to $29.5 million.

Hollinger International. Founder and media tycoon Conrad Black was sentenced to 6½ years
in prison and a $125,000 fine for multiple counts of fraud in siphoning money from the
company. Also sentenced were former Chicago Sun-Times publisher F. David Radler (29
months in prison and a $250,000 fine), Canadian executives Peter Atkinson (two years in prison
and $3,000) and Jack Boultbee(27 months and $500), and Chicago attorney Mark Kipnis (five
years’ probation and six months house arrest).

Countrywide Financial. North Carolina state treasurer Richard H. Moore has officially
requested that the Security and Exchange Commission investigate stock sales made by the
mortgage lender’s chief executive, Angelo Mozilo, which allowed him to significantly increase
sales of his Countrywide shares just prior to the mortgage crisis. “The timing of these sales and
the changes to the trading plans raise serious questions about whether this is a mere
coincidence,” Moore wrote in a letter to the commission. Planned stock-sale arrangements,
which specify the number of shares to be sold regularly, are intended to protect against
accusations of trading on inside information.

Merrill Lynch. At least two class-action lawsuits have been filed on behalf of shareholders
against the firm and former chairman and chief executive Stanley O’Neal, co-presidents
Ahmass Fakahany andGregory Fleming, and chief financial officer Jeffrey Edwards for issuing
false and misleading statements about the company’s involvement with collateralized debt
obligations (CDOs). When Merrill announced that a third-quarter charge on its income
statement would be $8 billion instead of $5 billion – the biggest quarterly loss in its 93-year
history – the stock plummeted, and Standard & Poor’s reduced the brokerage’s credit rating to
negative.

Wal-Mart. An appeals court has ruled that former No. 2 executive Tom Coughlin, who earlier
had been sentenced to five years’ probation for wire fraud, filing false tax returns, and using
Wal-Mart money and gift cards to pay for about $500,000 in personal items, got off too lightly
and must be sentenced again. Despite Coughlin’s net worth of approximately $50 million, the
prosecution had erroneously determined that he could not afford the penalty and that his health
was too poor to withstand a prison sentence. Coughlin had faced more than 28 years in prison
and fines of $1.35 million.

Budescu Madalina
EAI 1