How high-flying executives got rich off corporate rip-offs
June 28, 2002 | Page 5
WITH THE number of corporate meltdowns growing, ERIC RUDER looks at how last year's Wall Street darlings have become this year's symbols of what's wrong with Corporate America.
IN THE year before Enron took its Texas-sized nosedive, top executives at the Houston-based energy giant were laughing all the way to the bank.
Enron paid senior executives more than $744 million in cash and stock benefits last year, which ended with the company's collapse into what was then the biggest bankruptcy in corporate history. Just weeks before the crash, 140 top managers even got "retention bonuses."
Enron claimed that these were "a staple in bankruptcy planning." But even mainstream commentators say the payouts were nothing more than a scheme to enrich management before a bankruptcy judge took over.
This was nothing new. During its meteoric rise into the ranks of America's biggest corporations, Enron got rich by exploiting legal loopholes, avoiding taxes and using accounting trickery to pump up its bottom line. In fact, Enron managed to avoid paying any income taxes at all in four of the last five years--and even received $382 million in refunds.
And when it couldn't get around laws and regulations, it had two other options--use the politicians that it had bought in Washington to get the rules changed, or simply break the rules. That's how Enron and fellow energy industry crooks caused the California energy "crisis."
The bosses started out by pressuring California lawmakers to pass legislation that required utilities to buy electricity on the open market. The deregulation bill passed unanimously in 1996. Then the traders created artificial shortages in order to work their cons.
Recently released corporate documents describe Enron's secret scams--with codenames like "Death Star," "Fat Boy" and "Get Shorty"--to bilk the state out of hundreds of millions of dollars. The Death Star strategy, for example, involved sending electricity over transmission lines that Enron knew were already at capacity--forcing the utility managing the lines to pay Enron to divert its electricity to some other part of the power grid.
After pulling this off a few times, Enron traders realized that they didn't even need any electricity to sell. They just had to threaten to sell it in order to collect millions in fees--courtesy of California's consumers and taxpayers. "The net effect of [the Death Star] transactions," Enron execs wrote, "is that Enron gets paid for moving energy to relieve congestion without actually moving energy or relieving congestion."
After Enron's collapse, business commentators insisted that the energy giant was an isolated corporate rogue. But the last seven months have seen more corporate high-flyers collapse under shady circumstances--including a new record for the largest bankruptcy ever, set by the industrial conglomerate Tyco.
Meanwhile, some of the biggest names in Corporate America are scrambling to control the damage after disclosures that they also used Enron-style accounting scams.
And through it all, the bosses at the top kept raking it in. According to a recent news report, executives and board members at more than one-third of the largest public firms that have declared bankruptcy so far this year sold big chunks of their own stock holdings--before the price tanked.
And capitalism's defenders dare to claim that the wealthy deserve their fortunes because they worked hard to get ahead!
Rogue's gallery of corporate crooksKen Lay, Enron
Just before Enron went bankrupt late last year, CEO Ken Lay was paid a "bonus" of $67.4 million. Must have been for all that "hard work" he put in setting up thousands of limited partnerships to hide Enron's ballooning debt.
Or maybe he "earned" it by meeting with Bush administration officials--while Vice President Dick Cheney crafted a new national energy policy with dozens of policies specially designed to benefit Enron.
Enron workers--who were required to keep their retirement savings in company stock--lost everything when Enron went belly-up. But Lay will do fine--his "bonus" and several homes worth tens of millions should keep him fat and happy.
Gary Winnick, Global Crossing
But CEO Gary Winnick kept his raft afloat by buying political influence. While Enron went after Republicans, Global Crossing favored Democrats.
Meanwhile, the company kept inflating its profits by selling access on its network to other phone companies--and then buying it back for the same amount of money. No money ever changed hands--but each company listed the "sales" as income.
With the end coming, Winnick cashed out his stock--for a cool $734 million.
Dennis Kozlowski, Tyco
Using the same methods as Enron to hide debt and pump up stock prices, Kozlowski transformed Tyco from a mid-sized New Hampshire manufacturer into a Bermuda-based multinational with 250,000 workers. In the process, he piled up an incredible $27 billion in debt.
Meanwhile, Tyco's stock price jumped 15-fold from 1992 to 1999. Business Week last year awarded Kozlowski the title of America's "most aggressive CEO," praising his "willingness to test the limits of acceptable accounting and tax strategies."
Martin Grass, Rite Aid
In 1999, Rite Aid reported pretax income of $199.6 million--when it actually had a $14.7 million loss. And Rite Aid recently revised its corporate earnings between 1997 and 1999 downward by $1.6 billion--the largest financial restatement ever by a public company.
The charges "reveal a disturbing picture of dishonesty and misconduct at the highest level of a major corporation," said federal investigator Wayne Carlin.
Their worst crimes are legal
FOR MORE than 90 percent of the corporations that filed for bankruptcy in the first four months of 2002, Wall Street stockbrokers were advising clients to "buy" or "hold" shares in those companies. How could the "experts" be so wrong?
Because they fully believed their own hype about rosy economic prospects. "Out of exuberance and the promise--or mirage--of fat profits, business in the late 1990s poured huge sums into machinery, office buildings, factories, computers, software, new airliners, World Wide Web sites, trucks, cell phone networks and the many other tools that are used to produce and distribute the goods and services that people buy," wrote New York Times columnist Louis Uchitelle. "Then the nation's executives pulled back abruptly on their spending, finally realizing that with all their new tools, they could produce much more than they could profitably sell."
In other words, it's no longer worthwhile for corporations to produce products--not because there isn't a crying need for them around the world, but because it's not profitable enough.
For CEOs who rode the wave of economic expansion, it's natural--even necessary--to use all manner of deception and fraud to hide their losses as the economy begins to slump. The real crime, however, is that most of what CEOs do--from lining their own pockets to buying political influence to forcing workers to work harder for less--is perfectly legal.
Bosses like Lay and Winnick are unimaginably rich because so many people around the world struggle to scrape by. We need a socialist alternative to this system, which is corrupt to the core.