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Shades of Gray

Shades of Gray. The fine line between honesty and criminality in corporate America. Greg Farrell. Reporter USA TODAY Enron Arthur Andersen WorldCom HealthSouth Cendant. Character references. Ken Lay Jeff Skilling Bernie Ebbers Richard Scrushy Walter Forbes Martha Stewart.

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Shades of Gray

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  1. Shades of Gray The fine line between honesty and criminality in corporate America

  2. Greg Farrell • Reporter USA TODAY • Enron • Arthur Andersen • WorldCom • HealthSouth • Cendant

  3. Character references • Ken Lay • Jeff Skilling • Bernie Ebbers • Richard Scrushy • Walter Forbes • Martha Stewart

  4. Corporate Crooks • Destruction of $200 billion • Congress helped it happen • Penalized salaries over $1 million • Underfunded the SEC • Made it more difficult for investors to sue • Allowed auditors to act as consultants

  5. Corporate Crooks II • What is a crook? • Bad guys lie • Bad guys steal • Easy to recognize

  6. Good guys? • Successful • Innovative • Charismatic • Media stars • White House • Davos

  7. What unites these men? • Jeff Skilling, fraud at Enron • Walter Forbes, fraud at Cendant • Paul Bilzerian, securities fraud • Alan Bond, investment fraud

  8. Harvard Business School

  9. White-collar crime • It’s not “black or white” • The world is gray

  10. Statistical Ethics • Normal distribution • Pure evil? • Unadulterated good? • Most in middle

  11. Case studies • Middle manager at WorldCom • Senior manager at Enron

  12. WorldCom • Born during the breakup of AT&T • Incremental growth (1984-1996) • Stunning growth (1997-1999) • Acquisition of MCI, $5 billion income • Correlation with Internet bubble

  13. Trouble in 2000 • CEO Bernie Ebbers’ stock • Sinks from $1 billion to $500 million • CFO Scott Sullivan’s millions • Ebbers tells Sullivan to fix numbers.

  14. Cooking WorldCom’s books • Impossible for one • Sullivan recruits four • Conspiracy is born

  15. Betty Vinson • Careful bookkeeper • Married, one daughter • Family breadwinner • 1996 salary: $50,000 • 2000 salary: $80,000

  16. Sullivan’s scheme • Reverse accrual accounts • Appalled, but colleague convinces her • Threatens to resign a few days later • Conversation in Sullivan’s office

  17. Sullivan’s scheme II • Vinson comes around • Sullivan’s stellar reputation • Vinson’s salary tough to replace • Finding a new job difficult, arduous

  18. WorldCom’s slide gets worse • $544 million shortfall • No more accruals accounts to raid • Desperate tactics • Capitalize line costs

  19. Vinson’s dilemma • Knows that capitalization of line costs is wrong • Resolves to put her resume together and seek new job • Participates in conspiracy • Does it for 3 more quarters

  20. Meet the New Betty • By 2002, an innocent no more • She’s part of the conspiracy • What happened to “resume,” “new job”? • Rationalized each step • Focused on loss of $80,000 job • Never saw bigger threat ahead

  21. Planet Enron • Most elaborate fraud in US history • Pervasive greed • Criminal company?

  22. Brief history • Natural gas pipeline (1985) • At the mercy of gas prices • 1990: creation of the “gas bank” • Creation of new market • Enron becomes leading innovator

  23. Enron in the 1990s • Total focus on stock price • Attempts to duplicate “gas bank” strategy: • Deregulation of electricity markets • Enron Energy Services • Enron Broadband

  24. Enron: 1998 • Trouble maintaining 15% growth rate • Need to buy/sell assets at quarter’s end • Problem finding third parties

  25. Fastow to the rescue • CFO forms partnership • No pesky “3rd party” • Buys lousy assets • No questions asked • Never loses money • Stole $30 million

  26. Other tricks • Disguised bank loans as “sales” • Hid California profits in “cookie jar” • Assigned bogus values to assets • $80,000 lemonade stand

  27. Fraud at Enron • Systemic • Not just 3 or 4 people • 16 guilty pleas • 5 convictions • 100 unindicted co-conspirators

  28. Criminal trial of Lay, Skilling • Government alleges massive conspiracy • Lay, Skilling accused of lying to investors • Parade of cooperating witnesses

  29. Defense argument • Enron was actually making money • Implausibility of conspiracy • Logic: someone would have objected

  30. David Delainey • Rising star • Named head of EES • EES losses worsen • Skilling’s solution • March 2001 meeting • EES losses hidden

  31. Conspiracy • No guns required • Tacit support • Difficult to resist

  32. Whistleblowers • Sherron Watkins • Special personality • Ostracized • Demeaned by defense • Lonely role

  33. Conclusions • Nobody intends to break the law • Compliance techniques vary • Rationalizations • Are you willing to walk?

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