Category: Corporate Crime

Siemens’s $1.3 Billion Slap on the Wrist

The German electronics and engineering giant Siemens, embroiled for the past two years in a massive international bribery scandal, has reached settlements with U.S. and German prosecutors. The company will pay $450 million to the U.S. Justice Department to resolve criminal charges under the Foreign Corrupt Practices Act (FCPA) and another $350 million to the Securities and Exchange Commission to settle related accounting violations. The total payments of $800 million are by far the most any company has paid in an FCPA case. Siemens also made a deal with German prosecutors involving a payment of about $540 million.

Siemens’ s total payout of $1.3 billion is huge in relation to the usual puny penalties imposed on even the most egregious corporate malefactors, but it is actually a bargain for the company. With annual revenues of more than $100 billion and profits of more than $5 billion, it can absorb the penalties without much difficulty.

Most significant is the fact that, by making deals with the prosecutors, Siemens avoided a guilty plea or verdict that would have disqualified it from continuing to do business with lucrative customers such as the United States government. According to the FedSpending website, Siemens has been awarded between $250 million and $350 million in federal contracts annually during the past few years, much of it from the Department of Homeland Security. According to its most recent 20-F filing with the SEC, Siemens derives about one-fifth of its total revenues from government and civilian customers in the United States.

While it is good for prosecutors to get companies to disgorge larger amounts of their ill-gotten gains, there is little evidence that monetary fines that are still in the realm of the affordable for large corporations can serve as an effective deterrent against future wrongdoing. Until the penalties threaten the continued existence of the company, they can be seen as nothing more than a cost of doing business aggressively.

In the case of Siemens, that wrongdoing was said to include the payment of more than $1 billion in bribes, taken from slush funds and sometimes transported in suitcases, to government officials in countries ranging from Argentina and Venezuela to Russia, China and Vietnam. It was also said to have paid kickbacks to the former government of Saddam Hussein in Iraq to secure business under the United Nations Oil for Food program.

How thoughtful it was for prosecutors to make sure a company such as this can continue to do work funded by taxpayer dollars. Whatever the feds take in penalties will soon be earned back in contracts. In a country where street criminals still face harsh sentences, large corporations continue to be treated with kid gloves.

Rescuing the Villain in the Citigroup Bailout

Treasury Secretary Henry Paulson has once again shown his willingness to take speedy action to rescue his friends in the financial world while allowing industrials such as the Big Three automakers to twist in the wind. The safety net for Citigroup that Treasury, the Federal Reserve and the FDIC announced last night represents the latest reversal in the ever-changing bailout “plan.”

Less than two weeks after announcing he had given up on the idea of purchasing toxic assets from banks in favor of capital infusions, Paulson is now saying that Treasury and the FDIC will “provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion” of mortgage-backed loans and securities. Given the way those securities have been falling in value, that possibility is far from remote. Citi graciously agreed to absorb the first $29 billion in losses, but taxpayers will probably be on the hook for much more.

In addition, Treasury is giving Citi another fix of $20 billion in capital. Paulson is driving a slightly harder bargain than in the past round of infusions, getting Citi to pay a dividend of 8 percent, up from 5 percent in the previous deals. Citi will also comply with “enhanced executive compensation restrictions and implement the FDIC’s mortgage modification program.” The latter is perhaps the most hopeful aspect of this new bailout, in that some homeowners may benefit.

Yet it is still amazing to see the federal government give essentially a blank check to Citi while the automakers are in limbo. The Big Three have a lot of mistakes to answer for, but they don’t compare to Citi’s checkered history. Throughout its history, the company has made reckless decisions that weakened the financial system and necessitated its own rescue. As early as the financial panic of 1837, what was then called City Bank had to be bailed out by tycoon John Jacob Astor. In the early 20th Century, the firm, then the main bank of the Rockefellers and Standard Oil, was one of the first commercial banks to make a big move into securities. This paved the way for the excesses of the 1920s and the ensuing stock market crash.

During the 1970s, First National City Bank was a major instigator of lending to third-world countries, which later backfired on the big banks. That and other forms of forms of questionable lending weakened Citi’s financial condition, prompting it to solicit a big capital infusion from Saudi prince Al-Waleed bin Talal in 1991. Pursuing a replay of the 1920s, Citi merged in 1998 with insurance and securities giant Travelers Corp. and began acting more like an investment bank than a commercial one.

Over the past decade, Citi led the way in another boomerang situation: promoting subprime lending to low-income borrowers. In 2000 Citi spent $31 billion to purchase Associates First Capital, one of the more aggressive predatory lenders responsible for the wave of untenable mortgages that are now poisoning the financial system.

All this doesn’t include other scandals involving money laundering and collusion with the likes of Enron and WorldCom. In the latter two cases alone, Citi had to pay some $5 billion to settle investor lawsuits. Citi’s finances weakened to the point late last year that it had to get another Middle Eastern shot in the arm—a $7.5 billion investment by the government of Abu Dhabi.

And here we go again with another rescue—this time by a benefactor with the deepest pockets of all. Paulson would have us believe that Citi is a financial damsel in distress that must be saved for the good of the country. In fact, the company is more like a Snidely Whiplash villain who periodically lies down on the railroad track pretending to be a victim in order to get rescued by gullible Dudley Do-Rights. Who knows what mischief Citi will get into with its latest haul.

Bailed Out or Posting Bail?

While we wait to see whether the revolt against the Big Bailout survives, we can take some comfort in reports that numerous financial institutions are being investigated by the FBI and other law enforcement agencies for possible criminal violations in the practices that led the country to the current crisis.

The latest parties to find themselves on the hot seat are Fannie Mae and Freddie Mac, which yesterday revealed that they had received subpoenas from a federal grand jury in New York. According to a tally by Business Week, more than two dozen companies with roles in the financial mess have been investigated in the past year. It is heartening to think that more formerly high-flying Wall Streeters will be subjected to perp walks outside federal courthouses, as happened to two Bear Stearns hedge fund managers back in June (photo).

If the feds are aggressive about these investigations, we may learn that the corruption in the financial sector goes far beyond floating some overly risky securities.

Take the case of Wachovia, whose banking operations were just forced into the arms of Citigroup after its customers began to lose faith in the North Carolina institution. Wachovia’s problems were not just its portfolio of faltering mortgage-backed securities. Over the past year, it has been embroiled in a series of extraordinary scandals.

* In April 2008 Wachovia, accused by federal regulators of failing to take action against fraudulent telemarketers it knew were using its facilities to steal millions of dollars from unsuspecting victims, agreed to pay a fine of $10 million, contribute $9 million to consumer education programs and make up to $125 million in restitution to victims.

* That same month, the Wall Street Journal reported that Wachovia was being investigated as part of a federal investigation of Mexican and Colombian money-transfer companies believed to be involved in the money laundering for drug traffickers.

* In July there was a report on the Dow Jones Newswire that the Brazilian unit of Wachovia Securities (not part of the sales to Citigroup) was being investigated for aiding wealthy individuals commit tax evasion.

* In August Wachovia, following the lead of several other big financial institutions, agreed to buy back near $9 billion in auction-rate securities from investors who charged that they were misled into purchasing the volatile instruments.

And all this is apart from the Wachovia Securities broker in Ohio who, apparently on his own initiative, bilked millions of dollars from customers through fraudulent stock and real estate transactions. He was sentenced to four years in prison and ordered to pay more than $9 million in restitution.

Wachovia may be particularly unlucky that its alleged transgressions got discovered, but there is no reason to believe it is an isolated miscreant. Many of us have long suspected that fraud and corruption are rampant in the financial world. The pressures of the current crisis may finally expose the true extent of the rot.

The Tainted Money Managers Who Might Run the Bailout

Treasury Secretary Henry Paulson found little support for his $700 billion Wall Street bailout while testifying before the Senate Banking Committee on Tuesday, but the varied concerns expressed by committee members did not include Paulson’s plan to turn over implementation of the bailout to private asset managers.

It would be a serious mistake for Congress to assume, as does Paulson, that only experts from the private sector could carry out the purchase of massive quantities of “troubled” assets. The entire bailout proposal is highly dubious, but letting for-profit firms handle the transactions would make a bad plan much worse.

I’ve been writing about the theoretical conflicts of interest that such an arrangement would create, especially if some of the banks getting bailed out also get chosen to help manage the asset purchases. The ethical issues, however, are not entirely in the realm of the hypothetical. While we don’t know exactly which firms would be chosen by Treasury, the overall money management industry has a track record that is far from unblemished.

Yesterday, as Paulson testified along with Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox, Cox’s agency put out a press release announcing that it filed an enforcement action against AmSouth Bank and AmSouth Asset Management “for defrauding AmSouth mutual funds by secretly using a portion of administration fees paid by fund shareholder for marketing and other unrelated expenses that should have been paid by AmSouth itself.” AmSouth, now part of Regions Bank, agreed to pay $11 million to settle the charges.

This case is hardly unique. The SEC’s archive of litigation releases includes a multitude of enforcement actions against small and large money managers and investment advisers. In one of those cases, Stephen J. Treadway, who had been a top executive at PIMCO, agreed in 2006 to pay $572,000 to settle charges of fraud, breaching fiduciary duty and other violations of securities laws. PIMCO is reported to be a leading contender for a bailout money management slot.

Money management firms, which can also function as securities dealers, have also come under fire from state regulators. Earlier this year, the financial giants Citigroup, Merrill Lynch and UBS were pressured by those regulators to buy back some $40 billion in volatile auction-rate securities they had pressed on unsuspecting customers. As the magazine Bloomberg Markets reported last January, state and local governments themselves have often been the victims of unscrupulous money managers who pressured them to invest public funds in extremely risky securities.

Given the discussion by Paulson of using a technique called reverse auctions to purchase toxic assets from banks, it is interesting to note that in 2006 a prominent money manager, Mario Gabelli, agreed to pay $130 million to settle charges that he defrauded the Federal Communications Commission during the auction of cell-phone licenses in the late 1990s.

And these are the kind of firms we are going to put in charge of $700 billion worth of transactions using taxpayer money? That may make sense to a 30-year Wall Street veteran such as Paulson, but Congress should know better.

“Ethical Failure” and Offshore Oil Drilling

The phrase repeatedly chanted at the recent Republican convention — “Drill, Baby, Drill” — now sounds pornographic in the wake of the new sex and money scandal involving oil drilling companies and the federal agency that is supposed to oversee them. The Interior Department’s Inspector General has just come out with allegations that more than a dozen current and former staffers at Interior’s Minerals Management Service received improper gifts from industry representatives, who also put on wild parties for MMS employees. Gregory Smith, former director of the royalty-in-kind program at MMS, was also accused of having an illicit sexual relationship with an subordinate and paying her to buy cocaine.

The three reports just submitted by Interior IG Earl E. Devaney (photo) may be the most salacious government documents since the 1998 Starr Report on President Bill Clinton’s sexual peccadilloes.

Although the Interior Department website prominently features Secretary Dirk Kempthorne’s outraged response to the revelations, it does not see fit to provide the reports themselves. Fortunately, ProPublica, the online investigative reporting site, has posted the reports for all to view. Here are some highlights:

First there is a cover memo from Devaney decrying what he calls “a culture of ethical failure” in which some MMS employees adopted a “private sector approach to essentially everything they did. This included effectively opting themselves out of the Ethics in Government Act.” The private sector itself also comes in for criticism. Devaney suggests that the oil companies overseen by MMS were not especially helpful in an investigation that took more than two years and cost nearly $5.3 million. Chevron, Devaney states, refused to cooperate with the probe.

The first of the three reports focuses on Smith, who seems to have been confused about who was actually employing him. The report says he spent a substantial amount of his paid time doing work not for the federal government but for a private firm called Geomatrix Consultants that worked for oil industry clients. Smith also is said to have received improper gifts from employees of Chevron, Shell and a small operator called Gary Williams Energy Company.

The second report focuses on the people who worked under Smith. Apparently following his lead, many of them, according to Devaney, “developed inappropriate relationships with representatives of oil companies doing business with” MMS. Some of these relationships were pecuniary: two staffers were said to have received prohibited gifts from major oil companies on at least 135 occasions. Here, too, the gifts came from Chevron, Shell and Gary Williams as well as Hess. The report also reports on some brief “intimate” relationships a couple of MMS employees had with oil industry people. The sexual misconduct seems to have been a lot more limited than the other hanky panky, but it is irresistible to talk about regulatory agency employees’ being literally in bed with the industry at a time when some major oil companies are involved in a multi-billion-dollar dispute with MMS.

The final report focuses on Lucy Denett, the former associate director of minerals revenue management and the highest-ranking MMS staffer to have been caught up in the scandal. Denett is mainly accused of being overly generous to her Special Assistant Jimmy Mayberry as he was getting ready for retirement. According to the report, she improperly arranged a lucrative consulting contract for the firm Mayberry was going to set up after he left the agency.

Mayberry is said to have pleaded guilty to a criminal charge. The cases against Smith and Denett were referred to the Justice Department. Devaney asks Interior Secretary Kempthorne to take disciplinary action against the remaining employees involved. It would be nice if someone thought to take some action against those drilling companies, which seemed to have had no hesitation in corrupting federal employees. But then again, “ethical failure” is nothing new in the oil industry.

American Corporate Idol

Forget American Idol and Dancing With the Stars—here’s the contest you’ve been waiting for: the U.S. Chamber of Commerce 2008 Corporate Citizenship Awards. According to a press release put out by the Chamber, the awards “recognize companies, chambers of commerce, and business associations for making positive contributions to their communities, advancing important economic and social goals, and demonstrating ethical leadership and sound stewardship.”

The Chamber has just announced the finalists for each of the award categories. The winners in most of the categories will be chosen by “a panel of distinguished leaders in the field of corporate citizenship,” including Harvard Business School Professor Michael Porter, past winners and the board of directors of the Chamber’s Business Civic Leadership Center.

Let’s focus on the Large Business Award, which is given to companies with annual revenue of more than $5 billion. Although the public is not invited to vote in this category, we can cheer on our favorite contestant—once we figure out which one that should be. Let’s mull that over.

One of the most familiar names among the finalists is Verizon Communications, a telecom behemoth with $93 billion in revenues. Although the company’s traditional phone service business is highly unionized, its Verizon Wireless and Verizon Business units have vehemently opposed organizing drives by their employees.

Another finalist is Bank of America, which is now the parent of Countrywide Financial, the poster child for predatory mortgage lending currently being sued by various states for deceptive practices. B of A itself paid $460 million in 2005 to settle charges related to its marketing of WorldCom securities just before the scandal-ridden company filed for bankruptcy.

Also competing is Siemens USA, the American subsidiary of German industrial engineering giant Siemens AG. The parent company has been embroiled in a major bribery scandal that has resulted in the resignation of various managers, including some who have been convicted of misuse of funds.

Then there’s KPMG, one of the Big Four auditing and tax advisory firms. In 2005 more than a dozen of KPMG’s executives were indicted for promoting fraudulent tax shelters. The firm itself reached a deferred-prosecution agreement with the Justice Department but had to pay $456 million in fines.

The last finalist is known mainly to truck drivers. Pilot Travel Centers operates more than 300 truck stops in 41 states. It’s amazing to learn that this seemingly modest business has annual revenues of more than $13 billion. There’s not much objectionable about Pilot (except perhaps the fast food), but it turns out that Pilot is half-owned by Marathon Oil. In addition to having been identified as a potentially responsible party at ten different toxic waste sites, Marathon was one of a group of oil companies that agreed earlier this year to pay a total of $423 million to settle charges that they contaminated public water supplies with the gasoline additive MTBE.

Decisions, decisions. Should we go with the (alleged) union-buster, predatory lender, bribe-payer, tax cheat or polluter? Perhaps it’s best that the judging is being done by professionals, who are best equipped to appreciate the contestants’ unique qualities.

Prosecuting Individual Fraudsters is Fine, But What About Their Employers?

If there were an index showing the status of the financial profession in U.S. society, today would be recorded as a plunge. Three separate legal developments together convey the message that asset management, mortgage banking and private banking are all riddled with corruption.

In New York, two previously high-flying hedge fund managers at Bear Stearns were arrested by the FBI, handcuffed, subjected to a humiliating perp walk and indicted on criminal charges of fraudulently misleading investors about their exposure to subprime mortgage-backed securities.

In Washington, Deputy Attorney General Mark Filip announced that a nationwide investigation of mortgage fraud has resulted in the filing of charges against more than 400 individuals.

In Fort Lauderdale, Bradley Birkenfeld, a former official in the private banking operation of Swiss bank UBS, pleaded guilty to charges of conspiring to help wealthy U.S. clients evade taxes by concealing assets. There have been reports that Birkenfeld may divulge the names of thousands of other clients who also cheated Uncle Sam.

Apart from corruption, what these cases have in common is that prosecutorial zeal is being directed at individuals alone and not the institutions whose interests they were serving. Prosecuting bad apples is all well and good, but the Justice Department needs to be reminded that in many cases the barrel itself is corrupt.

In the case of mortgage fraud, at least, the FBI may be on the right track. Director Robert Mueller announced today that the bureau is investigating some “relatively large companies,” including mortgage lenders, investment banks, hedge funds, credit-rating agencies and accounting firms.

Let’s hope this investigation is for real—and that it results in some serious charges rather than deferred-prosecution-agreement slaps on the wrist. Maybe then the financial sector will begin to clean up its act.

Slapping the Corporate Wrist

Deferred prosecution. Corporate monitors. These are the less-than-intimidating terms used to describe the manner in which the U.S. Department of Justice goes after corporate crime these days. Not exactly in keeping with attitude of “throwing the book at them” applied to blue-collar criminals or the “Gitmo” treatment given to those charged as terrorists.

The Bush Administration has let many corporate offenders off the hook through the use of deferred prosecution agreements, which are arrangements under which the Justice Department postpones the filing of criminal charges against companies that agree to pay fines and submit to third-party monitoring. If the monitor determines that the company has cleaned up its act, the charges effectively disappear. The corporation avoids a major stain on its record, and the Justice Department avoids the trouble of putting on a trial.

This dubious practice had been going on largely under the radar. Russell Mokhiber, editor of the Corporate Crime Reporter, carried on a one-man effort to publicize it. Reports earlier this year that former Attorney General John Ashcroft’s consulting firm had been given a $52 million contract to serve as a corporate monitor for a medical supply company briefly put deferred prosecution (and possible impropriety in the selection of monitors) in the spotlight. Then the New York Times “discovered” the practice in a front-page story on April 9.

Thanks to the efforts of the House Judiciary Committee and its Chairman John Conyers, more is becoming known about the Justice Department’s light-handed treatment of corporate malefactors. Last week, Conyers and several of his colleagues announced that Justice had turned over the texts of 85 deferred prosecution and non-prosecution agreements, which were promptly posted on the Committee’s website along with a letter from Justice that includes the names of 40 monitors, most of whom turn out to be former federal prosecutors and other government officials .

Among the companies involved in the Justice Department’s list of unprosecution agreements (which Conyers said was missing at least a dozen cases) are: America Online, Bank of New York, Blue Cross and Blue Shield of Rhode Island, Boeing, BP America, Bristol-Myers Squibb, Chevron, HealthSouth, lngersoll Rand, KPMG, Lucent, Merrill Lynch, Monsanto, Prudential Securities and Textron.

The Justice Department is apparently sensitive to charges that it is not aggressive in fighting corporate crime. In a March 7 memo to U.S. Attorneys, Acting Deputy Attorney General Craig S. Morford warned that “the criminal conviction of a corporation may have harmful collateral consequences for employees, pensioners, shareholders, creditors, consumers, and the general public.” What a relief! Now, every time I read that a corporation caught committing a crime is being let off with a slap on the wrist, I can take comfort in the knowledge that the leniency is actually for my benefit.

Fallen Crusaders Against Corporate Abuse

For more than 30 years, big business has whined about class-action lawsuits filed on behalf of consumers, workers and shareholders. The Republican Party made plaintiffs’ lawyers one of its favorite bogeymen and “tort reform” a centerpiece of its policy agenda. John McCain carries on this dubious tradition, suggesting for example that putting limits on medical malpractice suits is a key element of healthcare reform.

Whether or not there ever was a real plethora of frivolous lawsuits, one fact is now undeniable: the plaintiffs’ bar is in disarray. Part of the reason is that conservatives succeeded in getting numerous state legislatures to impose restrictions on class-action lawsuits and individual damage cases. Yet perhaps more dramatic has been the spectacular demise in recent months of the country’s leading trial lawyers through personal legal entanglements.

The conventional wisdom is that these super lawyers were victims of their own greed, while conspiracy theorists might wonder how these giant killers were brought down in such short order. In any event, there have certainly been sighs or relief—if not spasms of schadenfreude—in boardrooms across America.

The most recent crusader to fall was Melvyn Weiss, who built a career filing lawsuits charging that companies had defrauded investors. In March, Weiss agreed to plead guilty to federal criminal charges, acknowledging his role in making millions of dollars in secret side payments to plaintiffs in class actions filed by his firm Milberg Weiss. He consented to $10 million in fines and forfeiture, and last week prosecutors proposed that he spend up to 33 months in prison.

Weiss’s former partner, the even more flamboyant William S. Lerach, entered a guilty plea last fall on similar federal charges. In February he was sentenced to two years in prison and ordered to forfeit $7.75 million. That was a small fraction of the several hundred million dollars in fees Lerach and his partners earned from scores of cases involving many billion dollars in settlements and awards from the likes of Enron and WorldCom as well as many less venal corporations.

In March, another larger-than-life trial lawyer, Richard “Dickie” Scruggs, filed a guilty plea in the face of allegations that he and others bribed a judge in Mississippi who was hearing a case involving a dispute over $26 million in legal fees from a mass settlement of insurance claims brought by victims of Hurricane Katrina. Scruggs is best known for his role in winning a $200 billion settlement from the tobacco industry in the 1990s.

There was never any doubt that Weiss, Lerach and Scruggs were motivated by personal enrichment at least as much as their quest for justice. Yet in the absence of adequate government regulation of business, their lawsuits served as a countervailing force against the power of big business. Now that they have been neutralized, what corporate abuses will go unchallenged?

Firm Headed by Major Republican Contributors Accused of Supplying Substandard Plane Parts

The Project On Government Oversight (POGO) and CBS News just revealed that Pentagon investigators have accused a California company of supplying substandard components for military and civilian aircraft for nearly a decade, charging that the firm committed fraud and bribery and exhibited “brazen disregard for the safety of soldiers and civilians as well as for the sanctity of laws, rules and regulations.” The company is privately held Airtech International Inc., which also goes by the name of Airtech Advanced Materials Group.

POGO and CBS obtained a September 2006 memo in which the allegations were made by a special agent of the U.S. Army’s Criminal Investigation Unit, who argued that Airtech should be debarred from doing business with the federal government. The investigator charged that Airtech, which makes light-weight composite materials, “knowingly supplied nonconforming products to DOD [Department of Defense] prime contractors.”

Airtech has not been debarred or formally charged in the matter. A company spokesperson told CBS “we are aware of no current ongoing investigation,” but CBS reports that a document dated earlier this month indicates that an “active investigation” is still being conducted by the Army. CBS also says the House Transportation Committee is looking into the matter.

One fact not mentioned by either POGO or CBS is that the two top executives of Airtech—CEO William Dahlgren and his son Jeffrey Dahlgren, who serves as President—have together made a total of $308,700 in federal campaign contributions since the early 1990s—all of it to the Republican Party or Republican candidates, according to the Open Secrets database. Among those candidates: John McCain, who received $1,000 from William Dahlgren in February 2007, and George W. Bush, who got $2,000 from William Dahlgren in May 2000. Most of the Dahlgren money—more than $250,000—went to the Republican National Committee.

Apart from seeking contracts, the Dahlgrens may also have been investing in politics to gain influence in regulatory matters. According to the inspections database of the Occupational Safety & Health Administration, Airtech was cited for a serious violation in September 2006. OSHA proposed a fine of $5,060 (which is on the high side for the agency) but later settled with the company for $2,700.

Another model corporate citizen supporting the Republicans.