Corporate Greed and Pathology

[Guest]

Lord Black is indicted
Press baron, three others accused in U.S. of pocketing $84-million
By PAUL WALDIE

Friday, November 18, 2005 Globe and Mail



Conrad Black is facing the battle of his life with U.S. justice officials, who have slapped him with a sweeping criminal indictment that could send him to jail for 40 years.
U.S. Attorney Patrick Fitzgerald alleged yesterday that, through lies, greed and theft, Lord Black and three former colleagues diverted $84-million (U.S.) out of investors' hands and into their own pockets.

"All in all, what has happened here has been a gross abuse by officers and directors and insiders who decided to line their pockets," said Mr. Fitzgerald, U.S. Attorney for the Northern District of Illinois.

At a press conference in Chicago, he added that Canadian taxpayers were also victims of the alleged fraud because Lord Black and the others allegedly disguised millions of dollars in bonus payments as something else in order to avoid paying taxes. "So there was sort of twin fraud, one upon the investing shareholders of an American corporation and the Canadian tax authorities."

[Guest]

fascinating to watch Lord Conrad Black in action.

He is quoted in the post today as saying, "Like all fads, corporate governance has its zealots". Regarding silly investors who dared to question his integrity.

Then, when investment house Tweedy Browne asked about his executive compensation he dismissed them saying something about, "contemptuous disregard for the facts".

I read these comments and amazed at the amount of self justification and ego each statement makes.

I am of the opinion that this kind of inability to even consider personal wrongs is one of the characteristics of a financial psychopath. I will follow this case with interest as it appears to have the makings of a good study on the topic.

[Guest]

Greed season: Wall Street bonus time
They win, you lose -- so why aren't you mad as hell?

By Paul B. Farrell, MarketWatch
Last Update: 7:46 PM ET Nov. 21, 2005


ARROYO GRANDE, Calif. (MarketWatch) -- If Oliver Stone did a sequel to "Wall Street," his classic 1987 film, Michael Douglas' Gordon Gekko character would be out of prison and heading a covert "psych-ops" team masterminding Wall Street's secret war against America's 95 million investors.


Yes, war. One Wall Street is winning because its enemy is a confused bunch of wimps. Oh, that's too blunt for your delicate ears? Well, I'm mad as hell, wondering why you're not mad as hell.

Don't you see the greed oozing from Wall Street this bonus season? And haven't you compared this gushing greed with the miserable market performance since the last crash Wall Street suckered you into? Why aren't you mad as hell?

In every war the victors get the spoils. Same here, as Wall Street doles out more than $20 billion in bonus money to its army. Huge bonuses: $105,000 to first-year associates right out of business school. Imagine, some 25-year-old with an MBA gets a bonus three times bigger than the average American's income.

Worse yet, Wall Street's top generals get one-time bonuses bigger than most Americans make in their lifetime, $6 million or more from the Wall Street Greed Machine. How do they justify those huge bonuses? By being greedy all year long, playing with your money while secretly siphoning big bucks off the top.

Look at Wall Street's rotten performance since the 2000 crash. Wall Street's a big loser. Seriously, have you checked the Wilshire 5000 or the S&P 500 indexes lately? Both are in negative territory, below where they were five years ago.

So if Wall Street's greedy bonuses don't make you mad and if the rotten performance with your money in the stock market doesn't make you angry then maybe you are a thoroughly brainwashed wimp.

Wake up, folks, Wall Street's at war with you, a covert psych-ops war, the kind the Federation of American Scientists says makes it "possible for coercive regimes to manipulate human beings by altering their psychological processes, controlling their behavior [usually] without the knowledge of the victims."

Wall Street's manipulating you with media spin, misrepresentations, propaganda, and intimidation -- anything to create anxiety, doubts and fear. Wall Street and its co-conspirators controlling the $8.4 trillion mutual fund industry are already heavy into this psych-ops warfare. Here are the two key targets:

High-value targets: 8 million millionaires

First, when it comes to scamming investors, Wall Street prefers targeting our small number of millionaires. They're what the military calls a "high-value" target with a big payoff. There are 8 million millionaires in America, with a total net worth in excess of $10 trillion. If Wall Street can skim off even a 1% fee on assets, that's $100 billion a year fee income, from just 3% of our 295 million citizens.

Higher-value targets: The other 287 million

For years the Wall Street's been telling Main Street we each need a million bucks to retire. One simple formula says for every $10,000 in annual income, you need $230,000 in assets. Want $50,000 annually? You need $1,150,000. Unfortunately, the net worth of the average American is closer to $15,000, not counting the value of homes. So you'd think Wall Street would write them off as a low-value target or just collateral damage.

Quite the contrary. But with the mass market of mini-account Main Street investors, the Wall Street Greed Machine needs a relentless, massive psych-ops blitz: Disinformation, propaganda, high-pressure sales gimmicks, half-truths, fraud and a well-financed arsenal of campaign donations and special-interest lobbyists, all cleverly hidden under the congressional and SEC sanctioned camouflage of nondisclosures. The goal is to keep investors uninformed, passive and dependent, unable and unwilling to counterattack Wall Street's ruthless war machine.

In this vulnerable state, the Wall Street Greed Machine does what Jack Bogle has been saying for three decades. Instead of just skimming 1% of assets (as it does with millionaires), Bogle says the Wall Street and its co-conspirators in the fund industry siphon off one-third of our returns -- as much as $160 billion a year investors never see.

You better wake up

For three decades I've been studying the behavior of the million people working in the financial-services industry, beginning with my five years at Morgan Stanley. One thing I've learned is that to succeed on Wall Street you must have what I call the "Greed Gene," a DNA marker that tolerates behavior most of us would call amoral, unethical or even criminal.

The fact is Wall Street's "Greed Gene" will never change. Never. It's inbred in the culture. That's who they are. Accept it. They're not your friends, no matter how much they smile, send birthday cards, pick up the lunch tab. They simply want to skim money off your assets. Period.

OK, what can you do? Sorry, but I am not going to run off another list of shopworn solutions, you already know them. Besides, Wall Street's psych-ops commandos have such overwhelming firepower their assault always win ... as long as you're wimpy enough to keep fighting their war by their rules.

The first thing you must do is wake up: The Wall Street Greed Machine is your worst enemy. Here are two rules to help you wake up. Rule One: Never trust anything you hear from anyone on Wall Street -- no brokers, no bankers, no analysts, no reports, no talking heads. Trust no one. Rule Two: Never forget Rule One.

[Guest]

from a Price WaterhouseCoopers survey on economic crime we start to see some common traits:

80% of fraud perpetrators are male, between ages of 31 and 40

almost one quarter of frauds were committed by members of senior management



Take a look at the pay options and handshake packages of any senior bank executive, and it starts to look like they are pretty well padded folks. I wonder if it is in the company interest, or self interest without repercussion?

[Guest]

December 1, 2005

CEOs cashing in
By LINDA LEATHERDALE

Are CEOs' pay packages, which zoomed by double digits last year while lowly workers were lucky to get a 2% raise, out of whack with reality?

Think John Roth. The former Nortel boss walked away with $123 million US in his jeans, just before the hi-tech firm posted the biggest corporate losses in Canadian history, 68,000 people lost their jobs and shares crashed from $124.50 to just pennies.

Think John Hunkin. The CIBC kingpin retired with a pay package of $52 million, and less than a month later the bank posted its worst quarterly loss ever, losing $1.9 billion in the third quarter of this year, thanks to fallout from Enron.

Today CIBC reports its fourth-quarter and year-end results. I'm sure shareholders will be watching closely.

Well, if it's any comfort -- the gap between company performance and CEO pay is getting better, according to a report released yesterday by consulting firm Watson Wyatt.

In short, the survey of 219 publicly traded companies, found CEOs who were paid above median salaries delivered a return to shareholders of 19.4%. Those paid below the median delivered only 8.6%.

The survey did not disclose the dollar amounts of those salaries, but did reveal salary increases for high performers were up 31% in 2004, compared to a year earlier.

Meanwhile, a media report on CEO pay published earlier this year said earnings averaged $5.5 million last year, up 57% from 2003, while bonuses climbed 24% to $813,716, and gains from cash-in stock options were $6.9 million.

The Watson Wyatt survey also showed the more shares a CEO owned, the better the performance of the company.

It also found the value of CEO exercisable stock options dropped by 45.3% at low-performing companies, but jumped 97.2% at high performing firms.

And it found the use of stock options is down at larger firms, but still popular with small-to-medium cap companies, said Ray Murri, Watson Wyatt's executive compensation leader.

He also pointed out better performing firms paid out higher bonuses to CEOs, than did lower performing ones, and that disclosure to shareholders of executive pay is getting better.

"Our study clearly demonstrates that the pay-for-performance philosophy is taking hold and companies are making strides in aligning CEO compensation to corporate performance," said Murri.

Now, here's a question. Are workers at high-performing firms being rewarded, as well?

This week, Statistics Canada revealed average earnings for Canadian workers were virtually unchanged from August to September, at $736.62 or $38,304.82 a year. So far this year, earnings are up by only 2.8%.

Meanwhile, a report by TD Bank economists shows men's real hourly wages plunged 10.4% between 1981 and 2004, while women's real hourly wages are up 4.1%. Average earnings for women is pegged at $25,300 a year.

So, why are CEOs enjoying such decent pay hikes, when average workers are not?

According to Murri, good CEOs are in short supply, and therefore firms have to pay to attract them.

Also, the shelf life of a CEO is shorter.

"They don't stay on the job for too long ... on average about five years," he said, adding they either burn out, get wooed by another firm or are fired. Pay packages, he added, have to take into account the downside risk.

So, here's my two cents. No CEO succeeds without loyal, hard-working employees, who deliver quality products or services, and hence returns for shareholders. If a firm is performing well, workers too deserve a reward -- and that includes a decent paycheque, profit sharing and/or share ownership.

Sadly, though, too many CEOs are boosting their bonuses by booting loyal employees out the door.

[Guest]

CEO pay is criminal. It really is out of control with compensation consultants having a hand in the thievery. The consultant gets the exec a high pay package and is rewarded by the company with other human resource contracts. It's the same story in the pension consulting industry.

[Stan]

Corporate Greed & Pathology – December 5, 2005

Great comments on understanding the reason for the investment industry’s behavour towards retail investors.

The first step in resolving a problem is to understand what the fundamental problem is. Too often we are dealing with the symptoms of the problem.

It seems to me that more effort on defining the problem and seeking a solution would be more productive than trying to deal with the issues that develop because of fundamental behaviour.

This forum is a great initiative and reinforces my optimism that if retail investors and concerned industry participants work together, change will surely happen.

Stan Buell

[admin]

The Unlearned Lesson of Enron--4 Years Later
Friday, December 2, 2005
By: Alex Epstein

Enron was brought down by irrational business decisions, not fraud.

Four years ago this month, Enron Corporation--number 7 on the Fortune 500--filed for bankruptcy, culminating a collapse that shocked America.

It is commonly believed that Enron fell because its leaders, eager to make money, schemed to bilk investors. The ethical lesson, it is said, is that we must teach (or force) a businessman to curb his selfish, profit-seeking "impulses" before they turn criminal.

But all this is wrong.

Enron was not brought down by fraud; while the company committed fraud, its fraud was primarily an attempt to cover up tens of billions of dollars already lost--not embezzled--in irrational business decisions. Most of its executives believed that Enron was a basically productive company that could be righted. This is why Chairman Ken Lay did not flee to the Caymans with riches, but stayed through the end.

What then caused this unprecedented business failure? Consider a few telling events in Enron's rise and fall.

Enron rose to prominence first as a successful provider of natural gas, and then as a creator of markets for trading natural gas as a commodity. The company made profits by performing a genuinely productive function: linking buyers and sellers, allowing both sides to control for risk.

Unfortunately, the company's leaders were not honest with themselves about the nature of their success. They wanted to be "New Economy" geniuses who could successfully enter any market they wished. As a result, they entered into ventures far beyond their expertise, based on half-baked ideas thought to be profound market insights. For example, Enron poured billions into a broadband network featuring movies-on-demand--without bothering to check whether movie studios would provide major releases (they wouldn't). They spent $3 billion on a natural-gas power plant in India--a country with no natural gas reserves--on ludicrous assurances by a transient Indian government that they would be paid indefinitely for vastly overpriced electricity.

The mentality of Enron executives in engineering such fiascos is epitomized by an exchange, described in New York Times reporter Kurt Eichenwald's account of the Enron saga, between eventual CEO Jeff Skilling and subordinate Ray Bowen, on Skilling's (eventually failed) idea for Enron to sell electricity to retail customers.

An analysis of the numbers, Bowen had realized, "told a damning story . . . Profit margins were razor thin, massive capital investments were required." Skilling's response? "You're making me really nervous . . . The fact that you're focused on the numbers, and not the underlying essence of the business, worries me . . . I don't want to hear that."

When Bowen responded that "the numbers have to make sense . . . We've got to be honest [about whether] . . . we can actually make a profit," Eichenwald recounts, "Skilling bristled. 'Then you guys must not be smart enough to come up with the good ideas, because we're going to make money in this business.' . . . [Bowen] was flabbergasted. Sure, ideas were important, but they had to be built around numbers. A business wasn't going to succeed just because Jeff Skilling thought it should."

But to Skilling and other Enron executives, there was no clear distinction between what they felt should succeed, and what the facts indicated would succeed--between reality as they wished it to be and reality as it is.

Time and again, Enron executives placed their wishes above the facts. And as they experienced failure after failure, they deluded themselves into believing that any losses would somehow be overcome with massive profits in the future. This mentality led them to eagerly accept CFO Andy Fastow's absurd claims that their losses could be magically taken off the books using Special Purpose Entities; after all, they felt, Enron should have a high stock price.

Smaller lies led to bigger lies, until Enron became the biggest corporate failure and fraud in American history.

Observe that Enron's problem was not that it was "too concerned" about profit, but that it believed money does not have to be made: it can be had simply by following one's whims. The solution to prevent future Enrons, then, is not to teach (or force) CEOs to curb their profit-seeking; the desire to produce and trade valuable products is the essence of business--and of successful life.

Instead, we must teach businessmen the profound virtues money-making requires. Above all, we must teach them that one cannot profit by evading facts. The great profit-makers, such as Bill Gates and Jack Welch, accept the facts of reality--including the market, their finances, their abilities and limitations--as an absolute. "Face reality," advises Jack Welch, "as it is, not as it was or as you wish. . . You have to see the world in the purest, clearest way possible, or you can't make decisions on a rational basis."

This is what Enron's executives did not grasp--and the real lesson we should all learn from their fate.

Alex Epstein is a junior fellow at the Ayn Rand Institute in Irvine, CA. The Institute promotes the ideas of Ayn Rand--best-selling author of Atlas Shrugged and The Fountainhead and originator of the philosophy of Objectivism.

http://www.aynrand.org/site/News2?page= ... _ctrl=1021

[admin]

LONDON (Reuters) - "Wanted: psychopaths to make a killing in the markets".

Such an advert will not be appearing in the world's newspapers any time soon, but it may have a ring of truth after research revealed the best wheeler-dealers could well be "functional psychopaths".

A team of U.S. scientists has found the emotionally impaired are more willing to gamble for high stakes and that people with brain damage may make good financial decisions, the Times newspaper reported on Monday.

In a study of investors' behaviour 41 people with normal IQs were asked to play a simple investment game. Fifteen of the group had suffered lesions on the areas of the brain that affect emotions.

The result was those with brain damage outperformed those without.

The scientists found emotions led some of the group to avoid risks even when the potential benefits far outweighed the losses, a phenomenon known as myopic loss aversion.

One of the researchers, Antione Bechara, an associate professor of neurology at the University of Iowa, said the best stock market investors might plausibly be called "functional psychopaths."

Fellow author, Baba Shiv of Stanford Graduate School of Business said many company chiefs and top lawyers may also show they share the same trait.

"Emotions serve an adaptive role in speeding up the decision-making process," said Shiv.

"However, there are circumstances in which a naturally occurring emotional response must be inhibited, so that a deliberate and potentially wiser decision can be made."

The study, published in June in the journal Psychological Science, was conducted by a team of researchers from Stanford University, Carnegie Mellon University, and the University of Iowa.

[admin]

Corporate Mandate
¤ 2005-03-03
The ubiquitous bumpf about putting clients first...

--------------------------------------------------------------------------------
By: John De Goey

Corporate Mandate
I just finished reading Joel Bakan’s book “The Corporation”, which I received as a Christmas present. As a UBC corporate law professor, Bakan’s basic thesis is that since corporations are legally considered to be people, what kind of a personality type might reasonably apply to a corporation? The rationale put forward shows pretty convincing evidence that if corporations were in fact human, they would be seen by society as irresponsible psychopaths who lack empathy and are incapable of feeling remorse.

Corporations were brought into existence to make money. That is their overarching purpose. Senior executives, therefore, have a legal obligation to “maximize shareholder value” at the expense of all else. In fact, the law forbids all other actions and motives. When side-effects (something economists call “externalities”) do harm to society, corporations look for ways to avoid the blame. Think of the long history of harm done by corporations through time: Bhopal, Exxon Valdez, Thalidomide, Enron. The list goes on and the market timing scandal that pitted the interests of shareholders against those of unitholders is likely to go down as another fine example in a long line of externalities.

It is with this in mind that I reflected upon the re-assuring tone and content of all the web sites, newsletters and mission statements that so many investment firms (both those who create investment products and those who recommend them) show to their clients. Almost without fail, there will be a reference to the phrase “the client comes first”. Clients, always on the lookout for decent, high-integrity companies to work with, are presumably made to feel all warm and fuzzy when they read this- and to hand over their life’s savings as an expression of their unfailing trust in these reassuring words.

A man (even if that man is a corporation) cannot serve two masters. Either he is serving shareholders or he is serving clients. Both are noble. Both are justifiable. But both cannot be served simultaneously. In the majority of cases, the more money a firm makes, the higher the cost borne by clients. Conversely, the more prices are cut to benefit clients, the more shareholders will feel the pain. Profits derived from price changes, for instance, are a zero sum game. Whenever one party is doing well, it is as sure as the night follows the day that this comes at the expense of the other party.

What I found try astounding in the book is that one of the world’s re-eminent economists, Milton Friedman is of the opinion that corporate profit is a moral imperative. Friedman believes that corporate responsibility is both illegal and immoral if it compromises profits. He believes it is both illegal and immoral to put the client’s interests first.

Quite apart from the severe consequences if Friedman is right (jail time for installing SO2 scrubbers?), this could also lead to somewhat humourous situations. Imagine having a shareholder showing up at a corporate AGM brandishing a mission statement saying “It says here that you’re putting the clients’ interests first- what the hell is that about, Mr. CEO? If you don’t start charging as much as the market will bear and sending me the money in the form of higher dividends by the end of the next quarter, I’ll get you ousted.”

The simple lesson is that things are seldom as they appear. It is obviously disingenuous of corporations to suggest that they are simultaneously pursuing both agendas to the point where both sets of stakeholders’interests first. No one can have it both ways. Even if CEOs said something like “we aim to balance the legitimate interests of all our stakeholders”, I would buy in, although Friedman likely would not. My view on the obvious disconnect is that the ubiquitous bumpf about putting clients first is really just another cynical attempt to get people to give you their money. Corporations don’t really mean it. Friedman says they would be breaking the law if they did.

John J. De Goey, MPA, CIM, FCSI, CFP is a Senior Financial Advisor

[admin]

FORMER HEALTHSOUTH CEO ACCUSED OF PILLAGING FIRM

Calgary Herald Thursday, December 29, 2005

Associated Press

HealthSouth Corp accused ousted CEO Richard Scrushy of trying to "pillage" the company of more than $100 million US in court papers filed Wednesday and said he isn't due anything for his firing.
Responding to a state court suit filed earlier this month by Scrushy, the Birmingham-based rehabilitation chain said in a counterclaim that Scrushy was directly responsible for a massive earnings overstatement that nearly drove it to ruin.
A jury acquitted Scrushy of criminal charges earlier this year. Scrushy claimed he was duped by top aides and middle managers who pleaded guilty in the fraud.
But in a court document, HealthSouth argued that Scrushy hatched the plot to make it appear HealthSouth was meeting Wall Street estimates, then "profited hugely" by selling more than $200 million in HealthSouth shares and drawing millions more in salary, bonuses and options.

[admin]

Grey Matter: an investment adviser's mental illness unleashes big trouble
Matthew McClearn

Robert Frost, the American poet, once observed that the brain is a wonderful organ. "It starts working the moment you get up in the morning," he said, "and doesn't stop until you get into the office." That was not the case, however, for former Vancouver investment adviser John Frederick Pryde. The functioning of his mind on the job--or, rather, its malfunctioning due to mental illness--may have cost his employer more than $10 million.

Canaccord Capital Corp. is today one of Canada's largest independent investment dealers. During the 1990s, as part of an ambitious growth-by-acquisition strategy, the Vancouver-based independent investment dealer swallowed half a dozen smaller Canadian brokerages, among them Vancouver's Brink Hudson & Lefever Ltd., which it purchased in 1998. The brokerage industry relies heavily on the performance of individual advisers; what Canaccord really bought was a collection of people, each of whom had his or her own strengths and idiosyncrasies.

One of those people was Pryde, an employee who'd joined Brink three years earlier. On the surface, he seemed a fine asset. He was regarded as successful, intelligent and hard-working. He seemed to know a lot about small-cap stocks. And he appeared to perform admirably, bringing in impressive revenues for the firm while ostensibly keeping clients happy. By the time of the acquisition, however, Pryde was already off the rails. He later admitted that, by then, he'd already conducted more than 400 unauthorized discretionary trades in the accounts of 14 clients.

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In other words, Pryde was executing transactions without explicit consent. Discretionary trading can mean something as simple as a broker attempting to sell a plummeting stock to avoid losses for a client who's hiking in the Peruvian Andes; alternatively, some advisers have been known to trade without permission in order to generate commissions for themselves at their clients' expense. (The latter practice is commonly known as "churning.") Sometimes clients informally acquiesce to unauthorized trading. In any case, the practice is against industry rules, unless the broker has explicit permission to trade on behalf of a client--both from the client and from his or her brokerage.

Pryde continued behaving recklessly at his new employer. In the three years following the Brink acquisition, he executed more unauthorized discretionary trades--in several hundred client accounts. Though few details are publicly available, it seems Pryde fell in love with a small number of small-cap stocks. In early 2001, he converted five client cash accounts into margin accounts, also without notifying the clients or receiving their consent. (Cash accounts are subject to specific rules that can be circumvented, albeit improperly, by converting them into margin accounts.)

Why was Pryde doing these things? One factor may have been that he suffered from bipolar disorder, also known as manic depression. Health Canada says about 1% of the population will experience it during their lifetime. Fortunately, it's treatable. But according to the Toronto-based Centre for Addiction and Mental Health, sufferers typically experience dramatic mood swings--and, when manic, they "may take part in risky and unusual activities...or get in trouble with the law. They may also feel invincible or all-powerful." As well, they may spend freely and acquire debt. Those are not ideal qualities in an investment adviser.

Pryde would later admit to enforcement officials at the Investment Dealers Association of Canada that through it all, he knew "due to his state of mental health...he posed a significant threat of loss to his clients." Between 1998 and 2000, manic episodes caused him to be hospitalized twice. Even then, he continued to place trade orders.

Somehow, Pryde's infractions went undiscovered for years. For one thing, Canaccord says it received no customer complaints. Another possible reason was that following its acquisition of Brink, Canaccord failed to integrate the firm quickly; the Brink office remained in a separate building and its compliance apparatus remained in place and largely unchanged. What's more, Canaccord says that Pryde hid his malfeasance well. "From what I understand, John Pryde was a very intelligent man," says Canaccord spokesman Anthony Ostler. "When he received client complaints, he managed to satisfy his clients' issues, and so they never came to the attention of branch management." (An IDA hearing panel, however, stated that Pryde made no effort to conceal his activity.)

At long last, in 2001, client allegations surfaced against Pryde. Canaccord suspended him in May of that year, and commenced an investigation. Alleging discretionary trading, unsuitable investments and conduct unbecoming, it fired Pryde one month later. The IDA immediately commenced its own investigation.

Mental illness is often said to come at significant personal and financial cost. For Canaccord this proved abundantly accurate. The company voluntarily settled with a majority of Pryde's clients, reportedly at a cost of at least $9.7 million. "No hardball was played here," says Ostler. "Canaccord was embarrassed by this. To the best of my knowledge, there have been few, if any, voluntary settlements of this magnitude in our industry."

The brokerage firm didn't settle with everyone, however; it saw several cases as materially different from the rest. According to Canaccord, six former clients sued Canaccord and Pryde in the Supreme Court of British Columbia. Collectively, those lawsuits seek $2.2 million in damages, plus other damages "that have not been quantified," according to Canaccord's latest annual report.

One plaintiff is Dale Johannesen. He alleges that in July 2000, and unbeknownst to him, Pryde began buying and selling shares in six small-cap companies, including Dexton Technologies Corp., Voxcom Inc., CST Coldswitch Technologies, Polymer Solutions Inc., ESI Environmental Sensors Inc., and the ironically named Illusion Systems Inc.--stocks that, Johannesen claims, Pryde personally held large positions in. The trading created misleading prices and trading volume in those securities, Johannesen further alleges. "In or about April 2001, Pryde could no longer support and continue the market manipulation," Johannesen's statement of claim reads. "Consequently, the prices of the manipulated securities fell." Lawsuits from other Pryde clients make similar allegations, none proven in court.


(advocate comments........the problem I have with the above story is not that humans exist in the investment business, and are subject to human failings. The problem I have is that his abnormal and excessive trading of clients accounts probably generated enough (millions) in commissions for himself and his firm that they were probably willing to look the other way for far too long. In fact, I can look back at so many cases like this in the investment industry where traders like this are viewed as "rainmakers" at certain firms, and given trips, perks, and phony titles like "vice president".)

(side note: if your investment salesperson has "vice president" proudly displayed on his or her business card, it is not because they are invited to the upper towers, but because they have "contributed" to the upper towers. Run.)

extra side note: if your investment salesperson has the word "advisor" on his or her business card, then hold them to the standards of a fiduciary (your interests must come first) and loudly ask for your money back on any transaction where your interest can be demonstrated to have not come first..........DSC funds in your acccount, heavy reliance on firms own proprietary funds, unsuitable investments that lose money etc., etc.

You will be fought every step of the way, beaten battered and bruised by an industry that will take steps to avoid being responsible for this legal duty to care properly for clients (kind of like they promise.........), but one of you WILL win this argument, and millions will follow. I believe it to be a matter only of when.

[admin]

FEBRUARY 6, 2006

SPECIAL REPORT

White-Collar Crime: Who Does Time?
Corporate criminals are punished more harshly today than in the '80s,
but hands-off executives may still face better odds


Does corporate crime pay? The record can seem pretty arbitrary. Tyco International Ltd.'s (TYC ) L. Dennis Kozlowski and WorldCom Inc.'s Bernie Ebbers got hammered for their misdeeds. But plenty of other corporate and financial titans at companies engaged in chicanery have come away only mildly bruised. Michael Milken, the embodiment of an earlier generation of scandals, served less than two years and left prison in 1992 with a fortune of roughly $500 million. Banker Frank Quattrone, a key figure in the more recent brouhaha over allocation of initial public offerings, faces 18 months and will keep much of the $200 million he made in the late 1990s.

Some beat the rap altogether. HealthSouth Corp.'s (HLSH ) Richard M. Scrushy, acquitted of charges he directed a $2.7 billion fraud, remains one of the largest shareholders of the chain of rehabilitation centers. A host of others at scandal-wracked companies, such as Global Crossing Ltd. (GLBC ) founder Gary Winnick, pocketed millions from stock sales and faced no criminal or civil charges at all.

As haphazard as these outcomes may appear, there are rules of thumb to keep in mind as the trial of Enron Corp.'s Kenneth L. Lay and Jeffrey K. Skilling gets under way in Houston. Here are a few:

MORE PUNISHING TIMES Generally speaking, convicted corporate figures get punished more harshly today than they did in the late '80s and early '90s. Milken, now-defunct Drexel Burnham Lambert's king of high-interest "junk" bonds, pleaded guilty to conspiracy and securities fraud in 1990 in exchange for a 10-year sentence, later reduced to 22 months for good behavior and cooperation with prosecutors. A defendant of his notoriety would not get off as lightly today, according to veteran prosecutors.

Federal sentencing guidelines, which weren't in effect when Milken's crimes took place, have ratcheted up the penalties for white-collar offenders, particularly where huge shareholder losses are involved. Attitudes have also changed. Public outrage over Milken's stock-manipulation schemes was relatively muted because the victims were primarily companies and faceless institutional investors. By the late 1990s, however, roughly half of American households had piled into the stock market, according to the Investment Company Institute, many through retirement plans. When the bubble burst in 2000, legions saw their brokerage accounts and 401(k) balances dip sharply. As it became clear that fraud lay behind some of the biggest corporate collapses, a large constituency demanded severe consequences, says Ira Lee Sorkin, a former prosecutor and official with the Securities & Exchange Commission now in private practice. "Middle America lost a lot of money, which has led to cries for tougher enforcement to put the scoundrels away," he says.

Financial penalties have become stiffer, too. Convicted in July of orchestrating the $11 billion accounting fraud at WorldCom, onetime billionaire Ebbers has little left to his name after settling with regulators, shareholders, and his former company. Adelphia Communications Corp. (ADELO ) founder and ex-CEO John J. Rigas, who received a 15-year sentence on fraud and conspiracy charges related to the looting of the cable-TV provider, faces a similar financial fate. He is appealing.

GREED ISN'T A CRIME Many companies played accounting games during the 1990s boom. But neither greed, dubious bookkeeping, nor suspiciously timed trading are necessarily criminal. Prosecutors must demonstrate not only that an action violated a specific law but also that the executive intentionally committed the bad act. "The evidence is very rarely black and white, and the law is often amorphous," says Steven R. Peikin, a former federal prosecutor now in private practice.

Ebbers and Winnick played similar roles as evangelists of the telecom boom, and both racked up huge stock gains before their companies crumpled. But while Ebbers will likely report to federal prison in Yazoo City, Miss., if he loses his appeal, Winnick hasn't been charged with a crime. The difference: The scam at WorldCom -- pretending that everyday expenses were capital investments, which artificially boosted earnings -- unmistakably violated accounting standards and securities law. Global Crossing did swaps of fiber-optic network capacity that made it look stronger financially than it was. But the swaps weren't clearly illegal.

Winnick had another big advantage: Unlike Ebbers, he wasn't his company's chief executive. As co-chairman of Global Crossing's board, Winnick persuaded investigators that he wasn't personally enmeshed in the company's problems. Enron's Lay, who served as both chairman and CEO at various times, is expected to attempt a similar defense.

Quattrone, a star banker at Credit Suisse First Boston (CSR ), helped dole out hot IPO shares to favored clients and supervised analysts who allegedly boosted wobbly Internet companies. But these practices, distasteful as they are to many, didn't lead to charges because they didn't violate any law. He was convicted of obstructing justice and witness tampering for suggesting, after learning of a grand jury probe, that workers tidy up their e-mail. He is appealing.

DEAL OR ROLL THE DICE Some of the hit-or-miss feel of white-collar justice stems from the defendant's dicey choice of pleading vs. facing a jury. Given the difficulties of proving complex frauds, prosecutors typically try to strike deals with midlevel executives to build cases against the top bosses. The difference in sentencing can be huge. Compare the five years WorldCom CFO Scott D. Sullivan got for helping prosecutors nail his boss with the 25 that Ebbers might serve.

But juries can exonerate as well as convict. Last summer, Scrushy fended off charges that he was at the center of the accounting fraud that permeated HealthSouth. Prosecutors thought they had a strong case, based on testimony from five former HealthSouth chief financial officers, who all pleaded guilty and implicated Scrushy. But his team poked holes in their testimony, and he played his hometown advantage shrewdly. He drew visible support from black pastors in Birmingham, whose presence as courtroom spectators may have impressed some members of the predominantly black jury. "The world may have thought he'd be convicted, as they now think Ken Lay and Jeff Skilling will be," says Robert Morvillo, a New York defense lawyer. "But trials take on a life of their own."

By Jane Sasseen, with David Polek

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THE NEW YORK TIMES
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January 29, 2006
'The Battle for the Soul of Capitalism,' by John C. Bogle
Mistrust Funds
Review by JEFF MADRICK
If anyone still harbors the fantasy that the business scandals of the past few years were the handiwork of just a few bad apples, they should read John C. Bogle's "Battle for the Soul of Capitalism."


Christoph Niemann

THE BATTLE FOR THE SOUL OF CAPITALISM
By John C. Bogle.
260 pp. Yale University Press. $25.
Bogle has been a Wall Street insider for 50 years, the founder and long the chief executive of Vanguard in Philadelphia, one of the three or four largest mutual fund management groups in the nation. At Vanguard, he refused to charge the high annual fees that his competitors did. He was also among the first to offer investors index funds, at a time when most mutual fund managers were still claiming they could easily beat the market averages. (Index funds essentially duplicate the market averages, and have typically outperformed most of the pros over time.)

In this book, Bogle abhors what he sees as rampant cheating among his peers - not only mutual fund managers but brokers, bankers, lawyers and accountants. It's not just a few bad apples, he says: "I believe that the barrel itself - the very structure that holds all those apples - is bad."

Consider Jack Grubman. He may have been the best paid of the analysts who made fortunes partly if not largely based on conflicts of interest. But he was not alone.

Grubman earned $20 million in a single year in part by urging brokerage customers to buy the stocks of the corporations that his parent company, Citigroup, had as investment banking clients. When Attorney General Eliot Spitzer of New York State charged a wide swath of investment banks with similar conflicts of interest, however, 8 of the 10 largest companies on Wall Street decided they had better settle the suit. Goldman Sachs, Morgan Stanley and Merrill Lynch, among others, gave back profits and paid penalties of $1.4 billion, and altered the inherent conflicts in their managerial policies as well.

Nor was it only a handful of notorious companies like Enron and WorldCom that, under the tutelage of the most prestigious lawyers, bankers and accountants in the business, overstated their profits. Bogle totes up about 60 major corporations that had to restate their earnings - and this was not an inclusive list. Their stock market value equaled $3 trillion. That is "an enormous part of the giant barrel of corporate capitalism," he writes.

Or take the mutual fund industry, which Bogle knows best and which angers him most. Leaders boasted how clean they were compared with their colleagues at the investment banks and brokerage firms. But the relentless Spitzer found that dozens of them were rewarding good customers with secret and highly lucrative trading favors. As for executive stock options, which tied compensation to the company's stock price and made so many businessmen extraordinarily rich, they encouraged managers to manipulate short-term earnings to prop up stock prices.

Many people are still reluctant to concede that abuse was so widespread, since what they fear most is an assault by government in the form of tougher regulations. Unsurprisingly, loud complaints are now being lodged by influential lobbyists in Washington about the Sarbanes-Oxley Act of 2002, the only serious measure passed in the wake of the scandals to control business excess. And the tough-minded chairman of the Securites and Exchange Commission, William Donaldson, recently stepped down in the face of opposition from the White House and business interests.

Unfortunately, Bogle is less good at telling us how to fix the problems than he is at telling us what went wrong. He wants to believe that if we put the owners - that is, the shareholders - back in charge, most of the fraud, deceit and greed would dissipate like the morning mist.

Genuine shareholder democracy, he argues, would require chief executives to worry about the long-term health of the company, not the short-term fluctuations of stock prices. They would be far less tempted to manipulate earnings. In particular, if shareholders had appropriate voting power, the abuses associated with executive stock options could be reduced. Because shareholders do not have adequate voting rights, Bogle says, reform continues to be stymied.

But are shareholders inherently more ethical than corporate managers? Did they complain about "short-termism" when stock prices were at their heights in the late 1990's, or only after their stunning fall? Wouldn't they tolerate a little manipulation for a higher stock price?

It seems as if Bogle prefers to avoid the more obvious issue: that government looked the other way. Bogle acknowledges this lack of effective regulation, but he considers it a side issue.

The fact is that Washington has relaxed financial regulations under both Democratic and Republican administrations, opening the doors to conflicts of interest between brokers and investment bankers. In 1998, government, despite concerns, refused to separate consulting and auditing business. Although the hedge fund Long-Term Capital Management nearly pushed the world's financial markets over the brink that same year, the government demanded no further disclosure of the well-concealed financing of the industry.

But the open and honest flow of information is the only true check on the manipulation of the markets. Government regulation and independent scrutiny are critical to the process. Such regulation is a public good, like education and the highway system. If it requires a little expense on the part of business now, it will make them more money in the long run.

Bogle should have pushed his fine analytical ability and strong moral sense farther. Still, we should be grateful that an insider like him is willing to elucidate the often murky and apparently deceptive workings of the Street. John Bogle has been making Wall Street a better place for decades. His book is yet another important contribution in an illustrious career.

Jeff Madrick is the editor of Challenge magazine and teaches at Cooper Union and The New School. His most recent book is "Why Economies Grow."


(advocate comments.........with no equivalent to Eliot Spitzer in Canada my opinion is that Canada is effectively "unregulated" when compared to the United States. It is truly a wild west as Bank Of Canada Governor Dodge has stated)

[admin]

Spotting psychopaths at work

On the way to work. But who will they find there?
How do you spot the psychopath among your work colleagues?
Professor Robert Hare, of the University of British Columbia, is a world expert on the "snakes in suits" who scale corporate ladders with consummate ease.

He delivered a public lecture on psychopaths at work in Belfast on Wednesday, in the run-up to a two-day conference organised by the British Psychological Society (BPS).

"Corporate psychopaths" use arrogance and superficial charm to scale the top of the ladder, knocking off whoever gets in their way, Prof Hare explained.

They see the world as one large watering hole. Their resources are sex, power and money

Professor Robert Hare

"White collar psychopaths will defraud people of their life savings, then quite happily go to the Mediterranean, have a villa and never give it a thought."

He estimates that one in 100 people in North America are psychopaths. You do not have to be Hannibal Lecter to fit into the profile.

"People might say he or she is charismatic, high profile or 'gets things done'. We have a whole series of euphemisms for the individual who may be self centred, grandiose, lacking in empathy and does not give a damn about everybody else," he added.


Predators

"Think of Robert Maxwell who destroyed thousands of lives," he said.

Such people are social predators who do not get bothered by ordinary social anxieties. They are self serving individuals, he explained.

Their only concern is food. They see the world as one large watering hole. Their resources are sex, power and money.

With New York psychologist Dr Paul Babiak, Prof Hare has developed a new 107-point questionnaire to identify which desks those smooth-talking "snakes in suits" might be hiding behind.


The "B-Scan", which stands for Business Scan, was designed by them.

It follows on from the "P-Scan" which is now considered to be the standard test for detecting criminals with psychopathic leanings.

The test involves interviewing people working with the person concerned to get a so-called 360 degree assessment of their personality.

The two experts' book, Snakes in Suits: When Psychopaths go to Work, is currently with the publisher and should be finished by the end of this year.

The two-day Belfast conference was organised by the NI branch of the BPS. Its theme is: Protecting the Public - The Assessment and Management of Dangerous Offenders.

http://www.hare.org/links/media.html